Self-Regulation Can Work, Says Reed

NYSE's interim chairman would not split its regulatory and business functions. Also: Scrushy takes the Fifth; two more companies contacted in Qwest probe; SEC looking into accounting at General Mills; and more.

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New York Stock Exchange interim chairman John Reed on Thursday adamantly said he disagrees with recommendations to break off the Big Board’s regulatory arm.

“They are calling for the end of self-regulation. I respectfully but strongly disagree with that view,” he told the House of Representatives Capital Markets Subcommittee, according to Reuters.

Reed added that he hoped to have a reform proposal for the exchange within the next 10 days or so. “I am hopeful we could have a vote by the [NYSE] membership that could take place by the middle of November,” he reportedly added.

Since Richard Grasso resigned as chairman of the Big Board amid a controversy over his pay package, critics have been calling for the end of self-regulation for all of the financial exchanges.

Reed’s remarks came the same day that the exchange informed five specialist firms that it will bring disciplinary action against them. The actions will allege failure to comply with fundamental NYSE auction market rules and policies, and applicable securities regulations, during a three-year period from January 1, 2000, through December 31, 2002, according to the exchange.

“Specialists did misbehave and broke the rules….but the system worked. The benefit of having an auction system seems to rest on solid ground,” Reed told the committee.

The disciplinary actions come only days after a number of the Big Board’s critics called for the end of the specialist system. Reed defended these market makers, though he agreed that changes would be needed if the specialist system were no longer working. He added, though, that “at this point, we don’t believe we’re there.”

He also reportedly said that the exchange is “contemplating an NYSE board of directors comprised of a substantial majority of independent directors that would exclude individuals from the trading floor and other parts of the broker-dealer industry, as well as current CEOs of listed companies.” He added that the NYSE was eyeing disclosure of its director nominating process and annual reports on the pay of the five most highly compensated officers of the exchange.

Reed, who came out of retirement to work for just a dollar, also said that his temporary job may just become a little more permanent. “My personal preference would be not to stay” on the NYSE board after ceasing to be interim chairman. He added, though, that if his “continued presence for a short period of time — a year, two years, whatever — would be useful, I certainly think that I have some obligation to take that seriously.”

Scrushy Takes the Fifth

The former chief executive of HealthSouth, who was booted out amid a $2.5 billion accounting scandal, refused to answer questions from lawmakers Thursday at another public hearing in Washington, D.C., choosing to invoke his constitutional right not to speak.

“The committee wants me to answer charges without facing my accusers,” Scrushy told the lawmakers, according to Reuters. “I am therefore, by advice of my counsel, forced to take the Fifth Amendment today until I can get a venue where I can face my accusers.”

The Associated Press described Scrushy as having “sat somberly in the front row” as members of House Energy and Commerce Committee’s investigative panel denounced his conduct and what they called a massive fraud at HealthSouth that nearly brought it down.

Rep. Jim Greenwood (R-Pa.), the panel’s chairman, reportedly called Scrushy “the last man standing” after 15 former HealthSouth officials pleaded guilty.

Over the weekend Scrushy told “60 Minutes” that he signed off on fraudulent financial statements because he trusted his five chief financial officers.

“Why is Mr. Scrushy unwilling to answer here today, under oath, some of the exact same questions asked of him by a reporter?” Greenwood demanded, according to wire service accounts.

Interestingly, earlier this week Scrushy’s attorneys filed a formal complaint with the Justice Department alleging that the lead FBI agent in the HealthSouth probe has a “special, personal relationship” with a government witness and may have broken the law by supplying sensitive confidential information to her, according to published reports.

Two More Companies Contacted in Qwest Probe

Redback Networks has become the second company to announce that the SEC is examining some of its deals with Qwest Communications.

The networking equipment company said the transactions were all entered into prior to fiscal year 2002 and involve the sale of products by Redback to Qwest, the purchases of certain products and services by Redback from Qwest, and certain equity investments.

Redback said it is fully cooperating with the SEC. It added that it cannot predict the duration or outcome of the commission’s examination and that SEC had not indicated any intent to pursue an action against Redback. “If, however, the SEC determines to pursue enforcement or other action against us,” the company warned in a government filing, “our management could be distracted, we could incur substantial costs and there could be a material adverse effect on our business.”

In February, the SEC filed a civil lawsuit against eight current and former officers and employees of Qwest Communications, regarding activities that occurred while each was employed at Qwest. One of the individuals named was Joel Arnold, Redback’s senior vice president of strategy and marketing, who was formerly executive vice president of Qwest’s Global Business Unit.

The lawsuit alleges that Arnold participated in activities intended to artificially accelerate Qwest’s recognition of revenue in two equipment sale transactions. The SEC is seeking to have Arnold and four other defendants permanently barred from serving as officers or directors of a public company.

Last week Tellium, another communications equipment company, said the Denver regional office of the SEC is conducting two Qwest-related investigations. In one investigation, the SEC is examining various transactions and business relationships involving Qwest and 11 of its vendors, including Tellium.

The part of the investigation that concerns Tellium, according to the company, appears to focus on whether Tellium’s transactions and relationships with Qwest were appropriately disclosed in Tellium’s public filings and other public statements.

The U.S. Attorney in Denver is also conducting an investigation involving Qwest, including the company’s relationships with vendors that include Tellium. The U.S. Attorney has indicated that, while aspects of its investigation are in an early stage, neither Tellium nor any of its current or former officers or employees is a target of the investigation, according to the company.

Tellium added that it is cooperating fully with these investigations. The company also warned that the investigations could result in substantial costs and a diversion of management’s attention and may have a material and adverse effect on its business, financial condition, and results of operations.

SEC Looking into Accounting at General Mills

General Mills may not be serving up the accounting practices of governance champions.

The company best known for Wheaties and Cheerios said it has received a formal request for information from the Securities and Exchange Commission concerning the company’s sales practices and related accounting. General Mills added that it was advised by the commission that it has not reached any conclusions related to the information requested.

The company said it believes that its business and accounting practices are proper and comply with all applicable regulations. It also said it is cooperating fully in providing the information requested.

In April, General Mills was contacted by the SEC as part of its probe of accounting irregularities at two food distributors, Royal Ahold of the Netherlands and Fleming Co.

Short Takes

  • CEOs expect GDP growth in the 3.3 percent range for the fourth quarter, according to The Business Roundtable; when surveyed in July about the following six months, they expected 2.3 percent growth. In 2002, GDP growth came in at 2.4 percent; the average annual GDP growth over the past decade has been 3.2 percent.
  • Timothy Geithner was named on Wednesday to head the New York Federal Reserve Bank, the second-most-powerful job in the Fed. He is currently director of the Policy Development and Review Department in the International Monetary Fund. His department plays a central role in the design and implementation of IMF policies and in the review of its financial programs and assessments of member economies.

During the last two years or so of the Clinton Administration, Geithner served as Under Secretary of the Treasury for International Affairs under Robert Rubin and Lawrence Summers, where he was a principal adviser and member of the executive branch’s senior team.

He succeeds William J. McDonough, who served as the bank’s president from July 1993 until he stepped down in June to become chairman of the Public Company Accounting Oversight Board.

  • Luminex Corp., a maker of biological testing technology, said acting chief financial officer Harriss Currie has been named to that position on a permanent basis.

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