Some good news...I hear Baltimore's politicians shout out about the need for auditing all agencies and the need to hire state and city workers, not contractors. We'll be watching to see if this was just a sound bite!
Bank of America Accord in Lawsuit Is Challenged
By GRETCHEN MORGENSON Published: April 20, 2012 New York Times
Lawyers leading a class-action lawsuit in federal court in Manhattan against the directors of Bank of America over its purchase of Merrill Lynch have agreed to settle the matter for $20 million even though damages in the case could reach $5 billion, according to plaintiffs in a parallel suit against the bank’s board in Delaware. Calling the settlement grossly inadequate and the result of collusion, the lawyers in the Delaware case have asked P. Kevin Castel, the judge overseeing the New York matter, to order the parties agreeing to the deal to justify its terms. If the settlement is approved by the Manhattan court, all damage claims made in the Delaware suit would be extinguished. That matter is scheduled to go to trial in October. The settlement was struck privately on April 12 by lawyers representing two public employee pension funds that had sued the directors of Bank of America for breach of fiduciary duty. The funds are the Louisiana Municipal Police Employees’ Retirement System and the Hollywood (Florida) Police Officers’ Retirement System. At issue in both the federal and state suits is whether Bank of America’s board breached its duty to shareholders in approving the 2008 acquisition of Merrill Lynch for $50 billion and whether it misled investors about the brokerage firm’s weakening financial condition leading up to the purchase. Struck during the depths of the financial crisis by Kenneth D. Lewis, then Bank of America’s chief executive, the Merrill deal generated billions of dollars in losses at the bank. Those losses led to Bank of America’s second request for bailout money under the government’s Troubled Asset Relief Program. According to the lawyers in the Delaware case, the $20 million deal is inadequate in several ways. First, the amount does not come close to the $150 million fine paid by the bank in 2010 to settle a Securities and Exchange Commission suit over the Merrill deal. Jed S. Rakoff, the federal judge overseeing that matter, said the evidence showed that the bank’s disclosures to shareholders about losses and employee bonuses at Merrill were inadequate. Judge Rakoff had rejected the initial proposal by the bank and the S.E.C. to settle the case for $33 million, calling it a contrivance at the expense of shareholders. The Manhattan court deal is also objectionable, the lawyers in the Delaware case said, because it would not require the directors to dig into their own pockets. The bank’s insurance policies extend well beyond the $20 million cost, the papers said, although the exact coverage was redacted in the filing. A spokesman for Bank of America declined to comment. In addition, the court filing contended, the settlement deal is the result of collusion between the lawyers for the bank’s directors and those representing the pension funds. The lawyer representing Bank of America’s directors 1 recipients CC: recipientsYou More BCC: recipientsYou Show Deapproached the New York plaintiffs about a settlement, after negotiations with the Delaware representatives collapsed, the filing noted. The Delaware plaintiffs would not accept a settlement amount within the limits of insurance covering Bank of America’s directors. When the Delaware plaintiffs learned of the negotiations with the New York plaintiffs and tried to join, they were met with silence. Joseph E. White III, a partner at Saxena White, one of the law firms representing the New York plaintiffs, said neither he nor his colleague on the case at Kahn Swick & Foti would comment. Over the last three years, the lawyers in the Delaware case have conducted extensive discovery, taking 48 depositions, including those of all 16 Bank of America directors at the time of the merger, and their experts estimate the damages at as much as $5 billion. The lawyers for the Delaware plaintiffs have also taken testimony from investment bankers and financial advisers who opined on the Merrill deal. There are four law firms at work on the Delaware case: Horwitz, Horwitz & Paradis; Chimicles & Tikellis; Wolf Haldenstein Adler Freeman & Herz; and James Evangelista. By contrast, the lawyers in the New York case have done little fact-finding, the filing contended. They have deposed just two of the bank’s directors, for example, and did not determine whether the board members had sufficient assets to contribute to a settlement, the court filing noted. As such, the lawyers who agreed to the $20 million settlement “have not taken the depositions of witnesses necessary to prove their claims, and have failed to pursue the production of highly relevant and prejudicial documents,” lawyers for the Delaware plaintiffs contended. Such documents were identified during discovery in the Delaware case. For example, the lawyers told the court that they discovered a high-ranking Bank of America official in charge of the Merrill deal had routinely deleted documents in spite of having been advised to hold onto them. Documents also emerged showing “threats made by the bank to its financial advisers to remove cautionary language from their fairness opinion in the proxy,” according to the court filing. Shareholders rely upon fairness opinions when voting to support or reject a merger. Chancellor Leo E. Strine Jr. is overseeing the Delaware case, which will not be heard if the proposed settlement goes through. Mr. Strine has noted in court hearings that the matter involves important issues of state law governing the many companies that are incorporated there.
Updated April 5, 2012, 5:56 p.m. ET Wall Street Journal
Investors' Prying Eyes Blinded by New Law
By MICHAEL RAPOPORT
Along with its outside auditors, StoneMor Partners L.P. STON -0.29%discovered flaws in 2006 and 2007 in the way it reported some of its revenue, and the cemetery owner and operator restated its results. Had the errors occurred under the new JOBS Act, they may have never been brought to light. Once President Barack Obama signs the JOBS act in the Rose Garden today, the clock will start ticking for the U.S. Securities and Exchange Commission to come up with rules that regulate the industry, Emily Chasen reports on Markets Hub. Photo: Reuters/Kevin Lamarque. That is because the act, which President Obama signed into law Thursday, allows some smaller, newer public companies to avoid outside audits of their so-called internal controls, like the one conducted for StoneMor. The waiver is one of many JOBS Act changes that ease regulation, with the intent of helping small enterprises raise capital and avoid costs. The act was aimed at concerns that small companies are overly constrained by regulation, particularly the Sarbanes-Oxley law passed a decade ago in the wake of the scandals at Enron Corp. and WorldCom. Mr. Obama said the act will "help entrepreneurs raise the capital they need to put Americans back to work." Critics of the JOBS Act, which stands for Jumpstart Our Business Startups, say that easing regulations will lead to more financial problems and fraud, and make it more difficult for investors to detect those issues. U.S. President Barack Obama walks off stage after signing the JOBS Act on Thursday. Before the JOBS Act, all companies except the smallest had to have their outside auditors weigh in annually on whether their internal controls were "effective." The JOBS Act allows "emerging growth companies"—those under $1 billion in revenue, public less than five years and under certain market capitalization thresholds—to be exempt from that requirement, as well as from a variety of other accounting and disclosure rules. Tim Yost, StoneMor's chief financial officer, says it is important that a company has sound controls. But a weakness in those controls, he said, "may not necessary indicate an overall weakness in the company." The Bristol, Pa. company's issues were related to making sure that revenue was correctly booked when burial vaults were installed. The flaws were corrected, and in fact the company's restatement actually increased its revenue and profit for the year. An analysis for The Wall Street Journal lends some support to the JOBS Act's detractors. The analysis, by AuditAnalytics.com, suggests that since 2004, when the Sarbanes-Oxley requirement for internal-control inspections took effect, 104 companies that have had issues with their anti-error, anti-fraud procedures, including StoneMor, would have been exempt from auditor scrutiny of those procedures if the JOBS Act had been in effect at the time. The review doesn't mean the JOBS Act would have led to missed problems at 104 companies. Not all flaws with a company's internal controls lead to financial problems, and many such problems could be found even if outside auditors aren't required to look. Under the JOBS Act, companies will still have to have their own management assess internal controls and disclose any weaknesses they find, as they do now. Also, even though an auditor review won't be required for emerging-growth companies, they may still get internal-control audits voluntarily to show investors a clean bill of accounting. But to the extent eligible companies take advantage of the legislation's provisions, investors may not find out as much in the future about companies' ability to prevent financial errors and fraud. In turn, some companies' financial problems may go undetected. Internal-control problems are "often indicators of material errors in financial reports," said Barbara Roper, director of investor protection for the Consumer Federation of America. "Those come with a significant cost to investors." Don Whalen, director of research at AuditAnalytics.com, says that even though companies will still have to assess their own internal controls, they could be less likely to detect and disclose problems without auditors looking over their shoulders. "You're not going to be quite as attentive if you're not worried about someone catching your mistake," he said. A broad bipartisan group of lawmakers as well as the Obama administration supported the bill as vital to helping small businesses and start-ups grow and, in the process, create jobs. The White House says it will "monitor closely" the measure's implementation to ensure it achieves its aims