SEC to NYSE: Practice What You Preach

Exchange must at least ''match the standards'' it demands from listed companies. Also: Billionaire loads up on Computer Associates; Mesa threatens proxy fight with airline holding company; Analogic to restate due to accounting issues; and more.

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Securities and Exchange Commission Chairman William Donaldson told Congress at a Wednesday hearing that self-regulatory organizations (SROs) like the New York Stock Exchange must at least match the governance standards they demand from companies they list.

“SROs play a critical role as standard setters for sound governance practices,” Donaldson said in prepared remarks to the Senate Securities and Investment Subcommittee. “Just as SROs have demanded that their listed companies strengthen their governance practices, we must demand that, at a minimum, SROs match the standards they set for listed companies.”

To this end, Donaldson said there are a number of related issues that merit the SEC’s attention. They include board composition and independence of directors; the independence and function of key board committees; the transparency of the SRO’s decision-making process; and the diligence and competence required of board and committee members to ensure their focus on the adequacy of regulation.

This said, the chairman conceded that an SRO that operates a market “has an inherent conflict of interest between its roles as a market and as a regulator.”

Robert Greifeld, chief executive of Nasdaq Stock Market Inc., agrees. On Wednesday he once again called for the stock markets to separate their regulatory and market functions, citing conflicts of interest, according to Reuters. “Our basic feeling is, if you have to take a long time explaining why your structure is right, you’re probably on the wrong path,” Greifeld reportedly said.

Greifeld stated that he has met with commissioners and staff at the SEC to discuss Nasdaq’s exchange application, which if approved will allow Nasdaq to separate from its parent, the NASD, and completely separate the two functions.

After the Senate subcommittee hearing, Donaldson said that SEC approval was “imminent” for the new listing standards proposed by the NYSE and Nasdaq more than a year ago, according to Reuters.

Earlier this week, The Wall Street Journal said the approval will come on Thursday. An SEC spokesman said he has no idea when this will take place.

Among the proposals: Companies would be required to have a majority of independent directors, to have more independent board committees, and to have regular meetings of independent directors apart from company officers.

Billionaire Loads Up on Computer Associates

Software giant Computer Associates, which is the subject of two separate government investigations into its past accounting practices, is apparently the target of another wealthy investor who has been aggressively buying up its shares.

Last Thursday, Swiss billionaire Walter Haefner of Careal Holding plunked down around $150 million to buy 5.8 million shares. He bought another 500,000 shares the following day.

The purchases lifted his holdings to 125.8 million shares. Two weeks ago, Haefner spent $92.6 million to buy 3.6 million shares.

By the time he finished his buying, the stock was already down more than 18 percent in two days after the company announced the resignations of its chief financial officer and two other finance executives.

You may recall that in the past few years, Computer Associates successfully fended off two hostile bids for the company by investor Sam Wyly.

In July 2002, Computer Associates paid Wyly $10 million, thereby guaranteeing that the company’s top officials would be re-elected to the board at its annual meeting. In 2000, Wyly sold Sterling Software — which he had acquired in a hostile manner — to Computer Associates for $4 billion.

Mesa Threatens Proxy Fight with Airline Holding Company

Mesa Air Group Inc. Tuesday said it will nominate a slate of seven directors to replace the current board members of Atlantic Coast Airlines Holdings Inc.

In addition, the regional airline has made an unsolicited stock offer of 0.9 of a Mesa share for each outstanding share of Atlantic Coast. The offer is worth $493.6 million, slightly lower than Mesa’s October 6 offer, which was worth $512 million.

“We are disappointed that we have not received a response from ACA management or its board of directors to our October 6 letter outlining an acquisition proposal for ACA,” said Mesa chairman and CEO Jonathan Ornstein, in a statement. “We have made a full and fair proposal to merge with ACA based on a proven strategy that we believe will result in long-term profitability.”

This is the first hostile takeover attempt in the airline industry in more than 20 years, according to The Washington Post.

Atlantic advised shareholders to take no action in response to Mesa’s offer.

Analogic to Restate Due to Accounting Issues

Analogic Corp., a producer of health and security imaging equipment, said it will restate its financial statements for the nine months ended April 30, 2003, and the fiscal years ended July 31, 2002, and July 31, 2001, to adjust for certain accounting practices.

The company said the restatement is necessary in order to apply appropriate accounting standards to the recognition of software revenue by its Camtronics Medical Systems subsidiary and an intercompany loan from the company to B-K Medical Systems A/S, a Danish subsidiary.

To reflect the restatements, the company’s earnings for the first nine months of fiscal 2003 were increased a penny for share to $3.59. However, 2002 earnings were restated to 23 cents a share from 25 cents a share, and 2001 profits were cut to $1.04 a share from $1.17 a share.

“With the assistance of its independent accountants, the company has taken steps to ensure that these transactions are properly accounted for in all past reporting periods and that transactions of this sort will be properly accounted for in the future,” the company said in a statement.

Analogic stated that Camtronics had previously accounted for all of its revenues in accordance with the Financial Accounting Standards Board’s Staff Accounting Bulletin 101, on revenue recognition. However, its independent accountants determined that certain revenues should have been deferred.

SEC Settles Charges with Former Controller

The SEC recently settled civil charges against Gregory L. English, former corporate controller of NCI Building Systems Inc., a Houston-based manufacturer of metal products for the non-residential building industry.

The complaint alleges that NCI overstated net earnings by $1.3 million during the third and fourth quarters of fiscal 1999, $7.5 million in fiscal 2000, and $1.2 million for the first quarter of fiscal 2001.

The company issued restated financials on June 8, 2001.

The SEC alleged a number of accounting errors at NCI’s Components Division had resulted in material misstatement of the financial statements. The errors resulted primarily from NCI’s failure to update standard costs and scrap-metal factors following NCI’s migration to a new management information system (MIS) in May 1999, and from failed attempts by NCI accounting personnel to manually correct for MIS problems in a key inventory liability account.

In July 2000, stated the commission, an accounting employee informed English that a probable “pick-up” of about $2.6 million would be made on the books, resulting in an increase in recorded book inventory. Shortly afterward, however, the employee retracted this initial conclusion and informed English that book inventory exceeded the physical counts by more than $2 million, which would require that English decrease the book inventory number.

Despite this information, in August 2000, English proceeded to authorize the erroneous $2.6 million entry, the SEC charged.

“As NCI’s corporate controller, English knew, or was reckless in not knowing, that the inventory overstatement would have a material effect on NCI’s financial statements,” maintained the SEC. “In addition, English knew or should have known of errors with NCI’s new MIS system and failed to correct them.”

Without admitting or denying the allegations, English agreed to pay a $25,000 penalty and to not serve as an officer or director of a public company for five years.

Short Takes

  • Rupert Murdoch on Wednesday withdrew a controversial share options package for News Corp.’s top executives because of strong opposition from Australian institutional investors and corporate governance watchdogs, according to the Financial Times. The package would have granted six executives, including Murdoch’s two sons, a total of 3.15 million non-voting preferred shares.
  • Data storage systems maker EMC Corp. said it would buy Documentum Inc. for about $1.7 billion to expand its document management software offerings.
  • One day after reporting a 50 percent rise in third-quarter earnings, Merrill Lynch lifted a salary freeze imposed almost two years ago.
  • Joseph Nacchio, former chief executive of Qwest Communications International Inc., agreed to pay $400,000 to settle charges that he unjustly profited from initial public offerings, according to Reuters, citing New York Attorney General Eliot Spitzer. Spitzer sued Nacchio and four other telecom executives last year, alleging they each received millions of dollars of shares of hot IPOs from Citigroup Inc.’s Salomon Smith Barney unit in the now banned practice of “spinning,” which involves exchanging IPO shares for investment banking business.

In May, Qwest founder Philip Anschutz agreed to pay $4.4 million to settle similar charges by Spitzer.

  • Corporate spending on airfare is expected to remain flat next year, or to fall, after declining by 7 percent in 2003, according to a survey by the Business Travel Coalition. Companies surveyed said the average fare they paid has fallen 20 percent since 2000.
  • Freeport-McMoRan Copper & Gold Inc. said it plans to more than double its dividend, to 80 cents a share from 36 cents. However, the company did not cite the recent reduction in the tax rate for dividends. Noting that it is also planning to buy back 20 million shares, the company said in a statement that these actions “will allow us to return a portion of our free cash flow to shareholders while we continue to reduce our debt.”

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