Investment Banker Named to Head SEC

William Donaldson, co-founder of DLJ, is nominated to top securities watchdog spot. Plus: Current Tyco management accuses former Tyco management of short-swing stock trades; Kmart restates, while the SEC goes after ex-WorldCom finance executives.


President Bush has nominated William Donaldson, the powerful Wall Street investment banker, to chair the Securities and Exchange Commission. If confirmed by the Senate, Donaldson will replace Harvey Pitt, who resigned amid a flurry of controversy on November 5.

The 71-year-old Donaldson heads his own New York-based investment firm, and is best known on The Street as co-founder of Donaldson, Lufkin and Jenrette (DLJ), the nimble investment bank that was especially adroit at underwriting junk bonds.

President Bush called Donaldson “an experienced and dedicated public servant. He’s a good man.” Donaldson’s nomination is being generally hailed by securities industry experts as a good choice.

“This is a good appointment, and frankly I’m amazed that they got someone of his stature and reputation to take the job amid all the controversy swirling around the SEC,” says Professor Charles Elson, chair and director of the Center for Corporate Governance at the University of Delaware. Elson points out that Donaldson knows the financial, corporate, and investor markets, and has a similar pedigree to former SEC chair Arthur Levitt, “except that Levitt didn’t have as much corporate experience as Donaldson.” And given the conflict-of-interest suspicion that weighed down Harvey Pitt’s tenure, Elson believes that Donaldson will be balanced in his decision making.

The market reacted favorably to the news that one of its own would be the top securities watchdog. When word got out that Donaldson had been nominated, the technology sector rebounded from Monday’s heavy losses and blue chip stocks extended their gains, according to CBS Marketwatch data.

After selling DLJ to the Credit Suisse Group in 2000, Donaldson served as chairman of Aetna Inc. until 2001. He served as chairman and CEO of the New York Stock Exchange from 1990 until 1995, following the October 1987 stock market crash. So he’s an old hand at taking the helm during a crisis in investor confidence.

He is also co-founder and former dean of Yale University’s Graduate School of Management.

Donaldson knows his way around Washington too. He was counsel to Vice President Nelson Rockefeller in 1975 and served as undersecretary of state under Henry Kissinger from 1973 to 1975.

Donaldson’s nomination must be confirmed by the Senate before he becomes the SEC chairman. The Republican Senate victory in November will give the GOP a slight 51-to-48 advantage over the Democrats when the session resumes in early January. Independent James Jeffords of Vermont will likely vote with the Democrats, The New York Times reports.

Donaldson is reportedly not commenting at length about his nomination until after he is confirmed. However, the Korean War veteran and U.S. Marine offered some homespun words of wisdom from his mother: “It’s time for all of us to pull up our socks.”

Donaldson’s nomination comes a day after President Bush appointed CSX railroad executive John Snow to head the Treasury Department, replacing former Treasury Secretary Paul O’Neill, who resigned on Friday.

Short-Swing and a Miss? Tyco Sues Swartz, Kozlowski

Is this the third strike against Dennis Kozlowski?

On Monday, the former Tyco International Ltd. chief executive officer was reportedly sued by the Bermuda-based conglomerate for racking up more than $40 million in so-called short-swing stock trades. Ex—Tyco CFO Mark Swartz was also said to be named in the suit.

According to reports, the lawsuit alleges that Kozlowski and Swartz made dozens of these kinds of trades beginning in August 2000.

Bear in mind that Securities and Exchange Commission rules allow companies to confiscate any short-swing profits made by corporate insiders who buy and then sell their company’s stock within a six-month period.

The suit reportedly seeks disgorgement of the profits, as well as unspecified fees and costs associated with the case.

Kozlowski and Swartz recently posted bail and are awaiting trial for allegedly stealing about $600 million from Tyco. If convicted on those charges, which range from enterprise corruption to grand larceny, the two could wind up spending as many as 25 years in prison.

In June, Kozlowski resigned as Tyco CEO just as he was about to be indicted by New York State. The charge: he evaded paying $1 million in sales taxes on paintings he purchased.

In other Tyco news, on Monday the company named former Lucent Technologies treasurer Martina Hund-Mejean as senior vice president, treasurer.

She will report to CFO David J. FitzPatrick.

At Lucent, Hund-Mejean was responsible for executing more than $12 billion in corporate financings, the management of customer-financings activities, oversight of investor relations, and the management of more than $30 billion in employee-benefit assets, according to Tyco. She also played a key role in the company’s restructuring efforts during the past two years.

She succeeds Michael Robinson as Tyco’s treasurer.

Hund-Mejean had served as senior vice president and treasurer at Lucent since 2000. Before that, she held various positions at General Motors, including assistant treasurer.

Kmart Finds Accounting Error

Kmart Corp., the largest U.S. retailer to ever file for bankruptcy, said it would restate its earnings by nearly $100 million. The restatement comes after an internal review of the company’s accounting practices.

Kmart management said none of the bookkeeping adjustments, which go back as far as three years, will have an impact on the company’s liquidity or increase obligations requiring a future use of cash.

“In accordance with our continuing commitment to enhance our accounting practices and procedures, we have decided to restate our financial statements to ensure that the most accurate and transparent information is available to readers of our financial statements,” said James B. Adamson, chairman and CEO, in a statement.

As a result of the restatement, Kmart will decrease its net loss for the 26 weeks ended July 30, 2002, by less than $100 million. The company will decrease earnings for the prior three years by a similar sum.

Management at Kmart indicated the adjustments stem from several accounting treatments, including an understatement of historical accruals for certain leases with varying recent payments and a related understatement of historical rent expense. The company also said it was making adjustments for certain costs formerly capitalized into inventory, as well as the premature recording of vendor allowance transactions.

In addition, Kmart management said it uncovered a software programming error in the retailer’s accounts-payable system. That error led to some paid invoices not being appropriately treated in the company’s financial statements. In fact, CFO Albert Koch told Bloomberg that the software glitch accounted for more than half of the restatement.

SEC Suspends Three Former WorldCom Finance Execs

Three former WorldCom finance executives who have already pleaded guilty to committing fraud are facing further sanctions.

The SEC suspended former controller David F. Myers, former director of general accounting Buford Yates Jr., and former accountant Betty L. Vinson from appearing or practicing before the commission as accountants. The sanctions stem from their roles in the telecom company’s $9 billion fraud, which resulted in the largest bankruptcy in history.

The commission’s complaints, which are still pending, allege that at the direction of WorldCom senior management, Myers, Yates, Vinson, and others caused WorldCom to materially overstate its earnings for at least seven successive quarters.

The SEC said Myers and Yates are further prohibited from acting as officers or directors of any public company.

Myers, Yates, and Vinson consented to the suspensions without admitting or denying the suspension orders’ findings, according to the SEC.

The commission added that monetary liabilities will be determined in the future.

SEC Settles with Former CFO, Others

The SEC also settled charges with the former CFO and three other former officers and directors of Regal Communications Corp. for engaging in what the commission described as a “massive financial fraud.”

The four ex-Regal board members include Bruce B. Edmondson, CFO and board and audit-committee member; Gerald Levinson, board and audit-committee member; Elliot S. Fisher, board and audit-committee member as well as in-house legal counsel and corporate secretary; and Arthur L. Toll, CEO, chairman of the board, and majority shareholder.

The SEC accused the four of making materially false and misleading statements and omitting material information concerning Regal’s financial condition and other facts in many financial reports and registration statements.

In addition, the SEC claims Regal used the false reports and registration statements in connection with a $35 million debenture offering and the acquisition of three companies.

Toll and Edmondson were barred from serving as officers or directors of a public company.

Toll, Edmondson, and Fisher also agreed to disgorge their illegally earned gains, mostly obtained through illicit sales of Regal stock. They include nearly $1.3 million from Edmondson, nearly $812,000 from Toll, and $131,000 from Fisher.

According to the SEC’s complaint, Edmondson caused Regal’s accounting staff to record fictitious business revenues and receivables into Regal’s general ledger. Edmondson and Toll apparently supported these fictitious items with bogus sales documents and bank records, it added.

“To lend credibility to the false information and to deceive Regal’s independent auditors, Edmondson and Toll paid off many of the false receivables with Regal’s own money, including funds that they obtained through concealed sales of Regal stock and warrants,” the commission asserted.

The SEC claims the two circulated more than $23 million from Regal’s checking accounts into the accounts of companies privately owned by them. They then caused those private companies to funnel a substantial portion of the money back to Regal in amounts equal to the amounts of the fictitious revenues and receivables, according to the commission.

Little Pay to Stay

Bad news for employees but good news for budget planners: raises are not expected to amount to much in 2003, according to at least two surveys released on Monday.

More than half of 130 large U.S. companies (average revenue of $1 billion) surveyed by Deloitte & Touche plan to shell out pay increases of 3.5 percent in 2003, the third straight year of modest raises.

As reported yesterday (Salaries Down, Disgruntlement Up”), the consulting firm said the string of modest pay hikes is contributing to low employee morale and, more important, may be undermining the loyalty of many companies’ most-valuable employees.

Meanwhile, Buck Consultants concluded in its survey of U.S. employers that the average 2003 salary increase is budgeted at 4 percent, up slightly from 3.9 percent in 2002.

In the Deloitte survey, 20 percent of respondents said they are eliminating bonuses for 2002 for the second consecutive year. Another 25 percent are giving bonuses that are 50 percent or less than what employees received during better economic times.

In the Buck survey, one-third of the participants paid bonuses at below-target levels (the median budget payout among respondents was 9 percent, compared with budgeted levels of 11 percent), and 20 percent made no bonus payouts at all—more than four times the percentage of nonbonus-payers in 2001.

At the same time, employee out-of-pocket costs for health-care benefits have been increasing as fast as or faster than raises at 76 percent of those companies surveyed, according to Deloitte.

“The biggest danger from continued low compensation is the negative impact it has on a company’s best performers,” said David Glueck, a director in Deloitte & Touche’s Performance Management and Compensation Practice, in a statement. “Inadequately rewarding top employees undermines their incentive to perform at their peak, so productivity is almost certainly falling. And, when the economy picks up, they are much more likely to leave.”

In fact, 75 percent of the companies surveyed by Deloitte concede that the biggest problem stemming from their restrained raises is an inability to sufficiently recognize top performers versus average or poor performers. And 48 percent acknowledge that low employee morale is another problem from low pay increases.

Buck found that the use of company stock and stock options as compensation continued to climb in 2002. In fact, nearly 21 percent of companies with an equity compensation plan reported that they lowered the criteria for participation in the past three years.

“Employers are discriminating more when determining which employees are really making a difference and need to be recognized and rewarded for their contributions,” said Antoinette Petrucci, a Buck principal.

For example, among Fortune 1,000 companies, 69 percent offered hiring bonuses in 2002, compared with 78 percent the prior year. However, the average hiring bonus for executives in 2002 was $20,000, compared with $15,000 in 2001.

Short Take

Former Verizon Communications chief financial officer Frederic Salerno has been named chairman of Lynch Interactive Corp., replacing Mario Gabelli.

Gabelli was named vice chairman and will remain as CEO of Lynch Interactive, a provider of wireless and wireline communications.

Gabelli, a legendary investor, had been Lynch’s chairman since 1986. He is also the chairman and chief executive of investment fund Gabelli Asset Management Inc.

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