Oxley Looking to Beef Up SEC

Proposed bill would increase fines, subpoena power; would also ditch state homestead exemptions. Plus: tax package ledger domain, Citigroup regroups, and whistleblower takes Duke to Federal court.


Finally, lawmakers have something other than tax cuts to talk about.

The latest issue: strengthening the Securities and Exchange Commission’s enforcement powers and increasing its ability to reimburse defrauded investors. Such are the provisions of “The Securities Fraud Deterrence and Investor Restitution Act,” a bill that House Financial Services Committee Chairman Michael Oxley and Capital Markets Subcommittee Chairman Richard Baker introduced last week.

The bill includes provisions that would:

  • Prevent violators of securities laws from shielding property from the SEC by removing state homestead exemption laws.
  • Give the SEC additional authority to impose civil money penalties in cease-and-desist proceedings.
  • Enable the commission to obtain necessary bank records in securities investigations without providing notice to the persons whose account records are sought.
  • Substantially increase maximum fines for certain securities fraud above the current $600,000 limit.
  • Authorize the commission to contract with private attorneys who have specialized collection expertise. That, in turn, would help conserve SEC resources and increase the amount of funds recovered.
  • Give states a mechanism whereby they can return recovered money to injured investors.
  • Allow undistributed portions of disgorgement funds to be used for investor education efforts.
  • Encourage private parties to provide the SEC with otherwise unattainable information such as privileged or work-product protected documents helpful to an investigation.
  • Authorize criminal prosecutors to release limited grand jury information to SEC staff.
  • Improve the SEC’s ability to serve subpoenas nationwide

Tax Cuts: Another Accounting Fraud?

In other news from Capitol Hill: The $350 billion tax cut package is on its way to President Bush, who reportedly said he will sign it even though it is less than half of what he requested.

Of course, that purported cut in the tax cuts is more bookkeeping than compromise. The fact is, several of the tax cuts in the bill contain extremely short sunset provisions. In fact, the much-ballyhooed increased exemption for dependent children will reset in two years. Obviously, the overall savings for that tax cut would have been much greater if it were based on a ten-year period, the President’s original time-frame for his tax package.

In fact, while the total tax cut package may be less than what the White House was looking for, the cut in tax rates actually comes close to the President’s original proposal.

The U.S. Senate gave final approval to the revised package on Friday, with Vice President Dick Cheney casting the deciding vote. The tax package lowers the top tax rate on dividends and capital gains to 15 percent through 2008 and speeds scheduled income tax cuts.

Accountant Sues Duke Power

A Duke Power accountant has reportedly filed a $2.5 million lawsuit against the company, claiming the utility retaliated against him for alerting regulators to allegedly improper accounting changes.

Barron Stone, who still works at the utility’s parent, Duke Energy Corp., filed the lawsuit last week in U.S. District Court in Charlotte, according to an Associated Press report. Stone claims the company demoted him and Duke attorneys harassed him in a five-hour-long “interrogation” without a break, the newswire noted. This, after Stone informed South Carolina regulators and Duke’s management — via an ethics hotline — about accounting moves allegedly made to avoid cutting power rates paid by consumers.

Reportedly, Stone claims in the lawsuit that Duke forced him out of the forecasting department, which dealt with classified information. He also alleges that his employer broke a former settlement agreement with him in late 2002 for $2.5 million. Under the settlement, Stone claims he would have stopped talking to the media.

A Duke spokesman denied that there was a formal offer of $2.5 million and says that Stone’s transfer was a lateral move, part of a restructuring that moved 13 employees, the AP noted.

Stone is now taking Duke to federal court, challenging an earlier ruling of the U.S. Labor Department which said there was either insufficient evidence of retaliation or that Duke’s actions preceded federal whistleblower protections. Those provision became effective last summer.

As CFO.com reported last year, Duke Power paid a $25 million penalty to customers after an independent audit by Grant Thornton LLP discovered that the utility had understated earnings by more than $123 million from 1998 to 2000. Stone’s questions triggered the audit, initiated by North Carolina and South Carolina regulators.

More recently, Jeffrey Boyer mysteriously left Duke Power as vice president for planning and finance. The company refused to provide a reason for his exit.

A federal grand jury is investigating Duke Power’s accounting practices. Duke Power has denied any intentional wrongdoing.

(Editor’s note: To find out how some companies are coping with the whistleblower provisions of the Sarbanes-Oxley Act, read “Dial ‘M’ for Malfeasance,” a CFO.com spotlight report.)

FASB Criticized on Pension Liability Approach

The Financial Accounting Standards Board is being taken to task for a potential new approach to determining liabilities for cash balance pension plans. Consultancy Watson Wyatt noted late last week that the proposal would artificially drive up the liabilities for many plan sponsors.

The benefits consultancy’s objections were triggered by comments made during a meeting of the Emerging Issues Task Force of the Financial Accounting Standards Board on May 15. During that meeting, the EITF appeared to have reached a consensus in favor of the new approach. FASB will consider ratifying the guidance as early as its meeting on May 28.

A cash balance plan is a hybrid between a defined benefit pension plan and a defined contribution plan.

The proposed FASB approach would require many cash balance plans to value their liabilities using a more conservative discount rate based on government yields. That rate is lower than the yields for high-quality long-term corporate bonds. Many companies currently use the corporate bond yield in figuring cash-balance plan liabilities.

Eric Lofgren, global director of benefits consulting at Watson Wyatt, pretty much blasted FASB for considering adoption of the discount rate for cash-balance plan liability. That approach, he said, “is seldom, if ever, used currently, and that completely undermines the goal of comparability.”

If forced to use the lower discount rate in valuing liabilities, he added, some companies would be compelled to substantially overstate their long-term plan liabilities. Others would be forced to take a charge against shareholder equity.

But Patrick Durbin, practice fellow at FASB, disagrees with some of Watson Wyatt’s conclusions. “The approach as we understand would increase the value of the liabilities,” he told CFO.com. “We wouldn’t in general agree that it would be ‘an artificial increase.'”

For the most part, Durbin says, Watson Wyatt made “a valid observation.” He adds that FASB is also aware that the approach is “not the way people had been interpreting FAS 87 [Accounting for Pensions], in practice.”

Durbin agrees that the suggested valuation approach may cause an increase to the liability, and that it is possible that there would be a need for an additional minimum pension liability, which often times results in a charge.

Ironically, Durbin notes that the cash-balance controversy arose following an observation made by FASB staff in the EITF’s discussion of a separate action that Watson Wyatt supports.

The support comes for an EITF action that affirms defined benefit accounting treatment for cash balance plans and recommends a specific attribution method (traditional unit credit) that, Watson Wyatt asserted, most closely tracks the value of benefits actually accrued and “does not represent a significant change.”

“We’ve heard the criticism from Watson and others,” Durbin says, noting that FASB may decide — based on that feedback — to further deliberate on the issue.

In addition to the EITF issue, the board has a separate project on pensions that comes up for discussion this week. The project, Durbin notes, only deals with disclosures relating to pensions, as opposed to the underlying accounting issues.

Citigroup Fires Analysts, Reorganizes Coverage

Citigroup, apparently looking to regroup in the wake of the Wall Street research scandal, has reportedly laid off seven top equity analysts and temporarily dropped coverage in nine sectors.

This, according to Reuters, which obtained a copy of an internal memo, in which the financial services company announced the realignment of its research department.

Analysts let go at Smith Barney, the investment banking unit of Citigroup, include Michelle Applebaum, head of metals and mining research, and Ray Niles, the bank’s top utilities analyst, sources familiar with the situation told the newswire service.

Other layoffs include wireless telecom analyst T.C. Robillard; Michael Millman, who covered companies such as H&R Block and Harley Davidson, and biotechnology analyst Lakshmi Bhojraj.

Citigroup’s airlines analyst Brian Harris and specialty chemicals analyst Gilbert Yang are being given new assignments, the sources added.

“As a result, our U.S. coverage universe has been reduced by 117 companies, placing current Smith Barney coverage of the S&P at about 70 percent,” an internal bank memo issued by Jonathan Joseph, head of U.S. stock research, reportedly said.

Citigroup declined to comment, Reuters noted. But, reportedly, a spokeswoman said Citigroup has recently been aligning its sector coverage in response to market conditions.

The bank is temporarily dropping coverage in utilities, healthcare services, life sciences, industrials, metals and mining, specialty chemicals, telecom equipment/wireless and airlines. An unnamed Citigroup source said these sectors are being consolidated and coverage on them would be reassigned within two months.

Last month, 10 Wall Street banks paid $1.4 billion to settle with prosecutors over alleged conflicts of interest in their equity research. The settlement also forced a reanalysis of the budgets for research analysts, Reuters noted, adding that Goldman Sachs, Morgan Stanley, and J.P. Morgan have all made recent cuts to the research staff.

Analysts and bankers are no longer allowed to work together in the pursuit of new clients, with bankers now bringing in more business.

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