Downgrade Possible? SEC Looking at Credit Raters

Commission examining the role of credit-rating agencies, possible conflicts of interest. Plus: PeopleSoft's Conway blasts Oracle's bid, ex-Xerox execs settle, while former Rite-Aid CFO pleads guilty.


Next up in the post-Enron corporate cleanup effort: credit-rating agencies.

On Friday the Securities and Exchange Commission announced it is considering new rules for credit-rating agencies, including the possible elimination of the NRSRO (nationally recognized statistical ratings organization) designation.

According to Dow Jones Newswires, the commission began looking into the credit agencies at the behest of House Capital Markets Subcommittee chairman Richard Baker (R-La.). That request came after questions arose about the agencies’ effectiveness in the wake of scandals at Enron and WorldCom.

Critics argued that the ratings agencies didn’t alert investors to deteriorating corporate credit worth. Indeed, both Standard & Poor’s and Moody’s maintained an investment-grade rating for Enron a few weeks before the energy giant collapsed.

Critics also claim that ratings agencies might have conflicts of interest, since corporate borrowers pay the agencies to rate their debt.

But the issue that could bring the biggest change is industry competition—or lack thereof. Since 1975, when the SEC first came up with the NRSRO designation, only four firms have earned that badge: Dominion Bond Rating Service, Fitch, Moody’s Investors Service, and Standard & Poor’s.

That’s almost a monopoly in some critics’ eyes, says Dow Jones. Some also claim the SEC has been to slow to approve new market entrants.

So what to do about NRSROs? One possibility: get rid of them altogether. Not all approaches are as severe, however. According to a memo attached to SEC chairman William Donaldson’s letter from SEC official Annette Nazareth, other proposals include clarifying NRSRO requirements and seeking public comment for the applications.

In a letter to Baker, Donaldson said the agency is “working diligently” to review credit-rating agencies, focusing on the level of competition in the industry, potential conflicts, and recent performance.

The SEC will put out a “concept release” to solicit public comment on the proposed changes.

Conway to Ellison: No Shotgun Wedding

Apparently Oracle Corp.’s surprise offer to acquire rival PeopleSoft Inc. has not being warmly received by PeopleSoft’s management team.

Or at least that would seem to be the case, based on a interview given by PeopleSoft chief executive Craig Conway to Dow Jones.

In the conversation, Conway, a former Oracle employee, described the $5.1 billion hostile bid from Oracle as a desperate act to block PeopleSoft’s recently proposed merger with J.D. Edwards & Co.

It’s “atrocious bad behavior from an atrociously bad company,” stated Conway. He also said PeopleSoft’s directors were appalled by Oracle’s action.

“It’s like having a wedding and [Oracle CEO] Larry [Ellison] showing up with a shotgun trying to get someone to marry him,” he continued.

But in a conference call on Friday, Ellison claimed Conway first approached him about melding the two companies’ business-software operations into a third company. That company, he said, would be better positioned to take on industry rivals like SAP and Microsoft.

Still, Conway didn’t hold back any punches in the interview. At one point, he told Dow Jones that “people will see through this for what it is: a ludicrous concept with malicious intent.”

Of course, ludicrous is in the eye of the beholder. While Conway may not think much of Oracle’s $16 a share offer, PeopleSoft’s owners might—particularly if a combined Oracle-PeopleSoft was a stronger competitor in the enterprise-application sector.

PeopleSoft’s board will review Oracle’s offer and provide an official response as soon as possible, according to Dow Jones. Conway told the wire service he was concerned Oracle’s hostile bid could confuse customers and result in a protracted dispute.

He also pointed out that the Oracle offer of $16 a share didn’t offer much of a premium for PeopleSoft shareholders. Of course, if Ellison and Co. come back with a sweetened bid—say, more than $20 a share—PeopleSoft’s management might have a hard time convincing the company’s shareholders that the proposal should be rejected out of hand.

Indeed, the offer already has bumped up PeopleSoft’s stock price. On Friday, after Oracle management announced its intention to buy its rival, the share price of PeopleSoft closed at $17.82. That’s a nearly 18 percent increase.

Nevertheless, Conway vowed not to let Oracle’s bid “distract or disrupt” PeopleSoft’s proposed $1.7 billion acquisition of J.D. Edwards.

This is a long way from over.

Blotter: Ex-Xerox CFO Settles, Ex-Rite Aid CFO Pleads Guilty

Six former officials at Xerox Corp., including former finance chief Barry D. Romeril and three of his finance managers, agreed last week to pay $22 million to settle SEC charges that they inflated revenue at the photocopy giant by billions of dollars in the late 1990s.

SEC lawyers argued that Romeril, along with onetime chief executives Paul A. Allaire and G. Richard Thoman, set an improper “tone at the top” of the company, pushing subordinates to meet earnings targets each quarter between 1997 and 2000 through accounting trickery.

The SEC also asserted that former controller Philip D. Fishbach, former assistant controller Daniel S. Marchibroda, and former director of accounting policy Gregory B. Tayler mapped out the plain. Among the alleged tricks: booking revenue early from leased copiers and using reserve accounts to cushion the blow when Xerox’s earnings began to decline, charged the SEC.

“It’s crucial that public companies have a tone at the top that reflects corporate ethics and good corporate governance,” said Paul R. Berger, an associate director at the SEC. “That’s not what happened here.”

The former executives neither admitted nor denied wrongdoing in agreeing to the settlement.

Romeril’s share of the fine is $5 million. He will be permanently banned from practicing before the SEC as an accountant.

Before Enron’s collapse, Xerox was often cited as an example of financial shenanigans. The copier maker restated its revenues by $6.4 billion for the period from 1997 to 2001. The Stamford, Connecticut-based company paid a $10 million penalty last year to settle charges related to the accounting irregularities, also without admitting or denying wrongdoing.

But Xerox isn’t out of the woods yet. The company is cooperating with the U.S. Attorney’s office in Connecticut in an investigation into possible criminal fraud at Xerox, spokeswoman Christa Carone told the Washington Post. She said the company has not been notified that it is a subject of the probe.

Meanwhile, former Rite Aid CFO Franklyn Bergonzi pleaded guilty to one conspiracy charge related to an accounting scandal that has plagued the drugstore chain since 1999. In addition, Bergonzi agreed to cooperate with prosecutors. The conspiracy charge carries a maximum penalty of five years in prison, plus a potential fine of up to $250,000. No date has been set for sentencing.

Bergonzi was to face charges in a trial this week with Martin Grass, former chairman and chief executive, and Franklin Brown, former vice chairman and general counsel. But on Friday, a day after Bergonzi’s guilty plea, the trial of Grass and Brown in a U.S. District Court in Harrisburg, Pennsylvania, was postponed for two weeks.

The delay may have been caused by Bergonzi’s last-minute agreement to cooperate with prosecutors. Government attorneys may now be looking to use information gleaned from the onetime Rite Aid CFO to bolster their case against his former boss, Grass.

In 2000 the SEC began investigating Rite Aid. In June the commission charged Grass and several former executives with a “massive” accounting fraud intended to inflate earnings and defraud investors. Rite Aid subsequently restated $1.6 billion in profits, then the largest restatement ever.

Short Takes

  • Like money under the couch cushions, a potential executive perk is buried between the lines of President Bush’s recently approved tax plan. Actually it’s a little more than couch change. “It’s the tax shelter of all tax shelters,” according to Brandeis University professor Robert Reich. In a commentary on National Public Radio’s business program “Marketplace,” Reich said that since stock prices are down—and since most executives reside in the 30 percent tax bracket or higher—stock options are on the way out.

What’s on the way in? According to Reich, preferred shares paying generous dividends will fast become the new hot executive-compensation vehicle. Why? If you’re paid in preferred shares, your tax rake on the dividends is only 15 percent, thanks to the changes wrought by the Bush tax package. It’s “a tax shelter for the corporation and a tax shelter for executives who will now get paid in dividends,” said Reich, former Labor Secretary under President Clinton. “It’s win-win.”

  • Some companies in China have to perform a value-added tax (VAT) assessment every single day, according to tax-compliance software maker Taxware Inc.’s roundup of the world’s weirdest tax laws. Also on the list: the United Kingdom, where gingerbread cookies with two chocolate drops for eyes incur no VAT. If the cookies have other delectable decorations, such as chocolate bow ties, they are subject to the standard 17.5 percent VAT.
  • Dutch brewing company Heineken, which is about to complete its acquisition of Austrian beverage group BBAG, announced the management team for the new company, which will be called Brau Union AG. BBAG CFO Wolfgang Berger-Vogel will be finance chief of the new company. He’ll keep his current boss, BBAG CEO Karl Bueche, who will be CEO of Brau Union. In addition, Stefan Orlowski, vice president of Zywiec, Heineken’s Polish subsidiary, will be COO of Brau Union.

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