ON THE DEFENSE:
Troubles in Corporate America are Making Companies Cautious, Executives Nervous
By AMANDA BRONSTAD and ANTHONY PALAZZO
These days, Wayne Lovett’s job is a lot busier than usual. As general counsel of Mercury Air Group Inc., Lovett is the company’s point man for internal questions about the raft of securities industry proposals coming out of Washington.
Has Mercury made loans to its officers that need to be accounted for differently? Are there stock-option grants that need to be treated differently?
Lovett, who also is executive vice president at the Los Angeles-based aviation services company, has been sending out regular updates to his colleagues. He finds himself researching association Web sites twice a week, instead of his previous once a month.
It’s a stepped-up pace that Lovett doesn’t entirely welcome.
“It’s a real pain,” he said. “I think I’m up to date, but it keeps changing.”
Executives at publicly held companies are discovering that they don’t have to work for Enron or WorldCom to be affected, at least indirectly, by the problems those companies’ transgressions have helped cause.
At press time, the Securities and Exchange Commission, Congress at the stock exchanges were considering new rules to improve the flow and reliability of corporate information.
The proposals run the gamut, from creation of a new accounting oversight board to having chief executives certify financial results, to extended jail times for executives who are convicted of fraud.
The changes are making some company executives anxious,so anxious, that they’re turning to outside lawyers.
“Clients are in some ways shell-shocked,” said Bryan Daly, a partner at Beck De Corso Daly & Kreindler PLC, an L.A. law firm specializing in white-collar crime. While they wait for new laws or regulations, chief executives fret over whether a past accounting decision will make them look bad.
Confidential Monitoring
Much of the activity has remained confidential, between company officials and their lawyers.
“We do have a group of key people that is monitoring this quite closely,” said LeeAnne Zumwalt, a spokeswoman for Davita Inc., a Torrance-based operator of kidney dialysis centers. “Most things at this stage are proposals.”
One impending deadline: the Securities and Exchange Commission’s requirement that chief executives and chief financial officers of large companies certify by Aug. 14 the accuracy of financial reports.
“(Certification) is an almost impossible task, and it’s causing a great deal of consternation in corporate America,” said Jan Handzlik, a partner at Kirkland & Ellis in L.A.
Chief executives of large corporations long have delegated such reporting responsibilities to controllers or chief financial officers.
“CEOs cannot devote attention to every last detail of a business or they wouldn’t have the time to be the CEO,” said Richard Marmaro, an attorney with Proskauer Rose LLP.
A perceived higher level of enforcement at the Securities and Exchange Commission is also causing consternation.
Since last fall, the commission has renewed a number of its pending investigations, Handzlik said. “Many cases that I was working on appeared to be dormant. But after these events, these cases have resurfaced,” he said.
This may or may not be evidence of stepped-up scrutiny at the agency. One of Securities and Exchange Commission Chairman Harvey Pitt’s first acts was a real-time enforcement initiative to expedite processing of cases.
This has led to an effort to clear out case backlogs, and may account for some of the renewed cases, sources said.
Handzlik, a defense attorney who handles corporate fraud cases, said securities work now makes up 45% of his caseload, compared to 25% last fall. More cases are coming out of the U.S. Attorney’s office, he said, and some that previously were regulatory issues are now becoming criminal matters.
Companies are also drafting new compliance programs or reviewing their existing programs to protect themselves against potential risks of criminal charges.
Stock Options
At Edison International, the corporate governance department is developing new procedures to ensure that the company files 8-K forms when its officers exercise stock options. The change would ensure compliance with provisions in reform bills that were passed by both the House and Senate. The bills must be reconciled and signed by President Bush before becoming law.
Corporate boards are also taking part. Some are asking auditors to take a look at the personal expense accounts of the chief executive, said Thomas Schulte, managing partner at accountancy RBZ LLP.
“That has been something we’ve looked at maybe one year but not another, because it came out completely clean,” he said. “Now, it’s something we’ve been asked about several times.”
Earlier this year, Burbank-based Walt Disney Co. hired corporate governance attorney Ira Millstein to advise its board. In April, the company announced several steps it had taken to improve corporate governance, including barring its outside auditor from performing consulting services, and eliminating consulting fees to its directors. Disney also said it would monitor corporate governance issues to ensure it was adhering to industry “best practices.”
Millstein is still advising the board, but a company spokeswoman, Michelle Bergman, declined to comment on how Disney is responding to the potential swath of new regulations.
While companies are responding, they’re not necessarily happy about all the regulatory activity.
One attorney, who asked to remain anonymous, represents a large aerospace client that considers the proposals in Washington simply one more burden.
The client has already instituted a number of regulatory practices, including a hot line that allows whistleblowers to call its general counsel or the Department of Defense with concerns about corporate fraud. Additional proposals are considered unnecessary, given the effectiveness of its current compliance programs.
“It’s like trying to figure out a fire prevention program where you bring in extinguishers and sprinklers, but somebody now says because another house caught fire that has none of that, you now have to install a fire prevention material in the ceilings,” the attorney said. “Now you’re going into overkill. Where does it stop?”
Bronstad and Palazzo are staff reporters at the Los Angeles Business Journal.
