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Goldman Sachs May Inspire a Redefinition of “Fiduciary Duty”

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

One bit of commentary I’ve noticed in the blogosphere following yesterday’s Goldman show is that the bank could toggle back and forth between being an investment advisor and a broker dealer when it came to any fiduciary duty it owed to investors in its crappy mortgage deals.

That may or may not be a loophole that needs closing, as Senator Collins’ line of inquiry suggested. Surely, banks like Goldman shouldn’t be able to use it as such.

But it’s important to remember that this is not an issue in the SEC’s case against the bank.


Take another look at the complaint. It charges Goldman with violations of three specific provisions of the securities laws, Section 17 (a) of the Securities Act of 1933 and Section 10 (b) and Rule 10-b (5) of the Securities Exchange Act of 1934. All of them relate to deceit, plain and simple.

Here’s the exact wording from the complaint: Goldman, the SEC charges, “employed devices, schemes or artifices to defraud, made untrue statements of material facts or omissions of material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon persons.”

Nope, nothing about fiduciary duty there.

Goldman’s defense here, essentially, is that the bank didn’t have to disclose those facts the SEC refers to, because the investors in the deal in question were sophisticated or already knew or should have known that another party that was betting against them had helped select the portfolio, and that any other information it failed to disclose wasn’t material.

Nothing about fiduciary duty there, either.

So while the back and forth over that issue may be important to any legislation aimed at reforming such practices, it’s not strictly relevant to the legal case.

Of course, we’re talking about a jury trial here, so the atmospherics surrounding the case, including what the bank should have done that it wasn’t legally required to do, aren’t totally irrelevant.

Anyway, I was somewhat puzzled over the significance of the fiduciary issue when I stumbled across it earlier this morning. And I figured others might be as well.

SEC Wins Backdating Case Against Former Maxim CFO

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

The SEC, under attack last week for its Goldman lawsuit and porn allegations, late Friday finally had a victory to celebrate.

Carl Jasper, the former chief financial officer of Maxim Integrated Products was found liable for securities fraud in a stock-option backdating lawsuit filed by the SEC’s San Francisco office, according to Bloomberg.

Carl Jasper, the former chief financial officer of Maxim Integrated Products was found liable for securitioption backdating lawsuit filed by the SEC’s San Francisco office, according to Bloomberg.

It was a rare civil jury trial involving backdating allegations.

Even rarer, it was the second backdating case decided in a court in one week.

Earlier in the week the former CEO of KB Home was convicted of four felony counts in a criminal stock option backdating case.

In the Jasper case, the former finance executive of the maker of chips for laptop computers was found liable on eight out of 11 counts, and cleared him on three, according to The Recorder. Bloomberg said he was found liable for fraud, lying to auditors, and aiding Maxim’s failure to maintain accurate books and records.

“We are pleased that a jury sitting in the heart of Silicon Valley recognized that stock-option backdating is, in fact, a fraudulent practice that matters to investors, and that Mr. Jasper, as the CFO of a public company, was ultimately responsible for misleading investors about the accuracy of Maxim’s financial reports,” Mark Fickes, trial counsel for the SEC, told the wire service in an e-mail statement after the eight-day trial.

Jasper’s lawyer, Steven Bauer, told Bloomberg in an e-mail he will ask the judge to overrule the jury verdict at a May 24 hearing. “Carl Jasper is a good man who never intended to do anything wrong,” he reportedly said. “This is the first step in a long road, and we are confident that in the end he will prevail.”

In late 2007, the SEC filed civil charges against Maxim, Jasper and former chief executive officer John F. Gifford, alleging that they reported false financial information to investors by improperly backdating stock option grants to Maxim employees and directors.

The Commission alleged that Jasper helped the company fraudulently conceal tens of millions of dollars in compensation expenses through the use of backdated, “in-the-money” option grants.

In a separate action, Gifford agreed to pay more than $800,000 in disgorgement, interest, and penalties to settle charges relating to his role in the options backdating.

Maxim, without admitting or denying the Commission’s allegations, consented to a permanent injunction against violations of the antifraud and other provisions of the federal securities laws.

The Commission’s complaints also alleged that Jasper was aware of the improper backdating practices, drafted backdated grant approval documents for Maxim’s CEO to sign, and disregarded instructions from CEO Gifford to record an expense in connection with certain backdated options. According to the Commission, Gifford should have known that the company was not reporting expenses for those in-the-money stock options and instead was falsely reporting that they were granted at fair market value.

According to The Recorder, in his opening statement at the trial, Bauer said Gifford, who is now deceased, was to blame for the backdating and not Jasper.”You can’t talk about options at Maxim without talking about Mr. Gifford,” Bauer reportedly told the court. “You can’t talk about picking dates without talking about Mr. Gifford.”

The SEC is seeking injunctive relief, disgorgement of wrongful profits, a civil penalty, and an order barring Jasper from acting as an officer or director of a public company.

Early last week, Bruce Karatz, the former CEO of KB Home was convicted of four felony counts in a stock option backdating case. He was found guilty of two counts of mail fraud, one count of lying to company accountants and one count of making false statements in reports to the Securities and Exchange Commission, according to published reports.

He was acquitted on 16 other counts, including mail and wire fraud, securities fraud and filing false proxy statements, according to Bloomberg.

He faces up to 60 years in prison when he is sentenced.

Will CFO’s Audit Fee Benchmark Tool Help Keep the Big 4 Honest on Fees?

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

There’s a bit of a tiff going on over at my former place of employment as a result of the cover story in the latest issue of CFO Magazine on the recent fall in auditor’s fees.

Some critics seem to fear that the phenomenon will be encouraged by a new benchmarking tool the website unveiled on April 1.

For a fee of $1,200, the tool allows companies to compare the fees that their peers pay for auditors. The process should be both quicker and more comprehensive than the requests for proposals now put out by many companies trying to figure out what they should be paying.


Accounting mavens David Albrecht and Lynn Turner, however, seem to worry that such an exercise will lead to the further commoditization of audits, and so to lower quality financial reporting, even though there’s no evidence the increased fees we saw in the wake of the Sarbanes Oxley Act did anything to improve its quality. Lehman Brothers, anyone?

Yet after the article appeared, Turner sent around comments on his list serve saying it contained several “factual inaccuracies” and that “a firm cannot do the same amount of work with these lower fees without seeing a huge reduction in profits.”

One problem here, it seems to me, is that we’re talking about an oligopoly, which invariably skews the normal effects of supply and demand. Albrecht concedes that the industry is an oligopoly but doesn’t make a cogent point about the significance of that. And he misses the other complication, which is that SarBox not only required auditors to review a company’s internal financial controls as well as its financial results, but also prevented auditors from offering audits as loss leaders for their more profitable consulting services. Now auditors can’t offer both services to the same clients. So audits have to stand on their own two feet.

Turner gets this point, though he confuses the chronology of the regulatory events involved. And he seems to suggest the article is flawed in the conclusion it draws about it, without saying how.

Here’s the point. If, in fact, the extra work SarBox required inflated auditors’ profits, why shouldn’t CFOs be able to make sure they’re getting what they pay for?

And the apparent assumption that benchmarking will inevitably lead companies to push for lower fees seems a bit shaky to me. As CFO.com’s editorial director Tim Reason points out, the process may instead merely keep auditors on their toes. Are Albrecht and Turner arguing that opacity is necessary for the public good, so auditors can pad their fees with impunity? Sorry, but that just doesn’t compute.

In an email to me this morning, Tim wrote: “We think finance executives and audit committees will benefit from having an independent, trusted editorial source provide them with a quick way to benchmark their fees-and make sure they are neither too high nor too low.”

Too low? Sure. You get what you pay for.

Tim also points out that there are no advertisers or sponsors for the tool. “It is a pure editorial offering being made directly to our readers, giving them information they’ve been asking us for years.”

Now there’s a radical idea.