Arthur Andersen is the latest lucky recipient of the Carl Spackler Total Consciousness Award ("And he says, 'Oh, uh, there won't be any money, but when you die, on your deathbed, you will receive total consciousness.' So I got that goin' for me, which is nice").

As discussed in this article in the NY Times, the U.S. Supreme Court unanimously reversed the 2002 conviction of Arthur Andersen on charges of obstruction of justice in connection with the collapse of Enron.  Unfortunately, this reversal comes a bit late to help AA in any way whatsoever, as the conviction amounted to an almost immediate death sentence for AA.

So although AA did go out of business and all of its 28,000 employees lost their jobs, it does have this Supreme Court opinion (courtesy of the White Collar Crime Prof Blog), suitable for framing.  Which is nice.

The AP reports that a man who held himself out as a "financial pastor" has pleaded guilty to mail fraud, securities fraud and embezzlement charges.  He allegedly defrauded Christian investors to the tune out of nearly $20 million.

According to the article, William T. Warren

targeted people at churches and religious organizations, mostly in Washington, and ran a Web site that said he wanted people to "achieve victory and godliness in their finances," according to court documents in the case.

The FBI said Warren persuaded people to invest their life savings, promising yields of up to 40 percent. Instead, he ran a scheme in which he paid investors who had been with him longer with funds from new investors, prosecutors said.

The financial pastor's website--reportedly "Excellentlife.org"--no longer appears to be functioning.  FYI, for all of you other wannabe financial pastors out there, the domain name FinancialPastor.com remains available. 

OK, so it's not really "securities litigation"-related (at least not yet), but the WSJ has an interesting article about a new security offering that will let investors hedge against possible real estate losses.  According to the article, Robert Shiller, a Yale University professor and the author of "Irrational Exuberance," is also a lead figure at a company called Macro Securities Research.  This company has

developed financial instruments – called "MACROs" – that will be tied to a housing index that tracks property values in certain cities. By purchasing Up MACROs or Down MACROs, investors would be able to place bets on whether a property market is going to keep rising, or whether it's going to fizzle.

In effect, speculators could play the bubble: They could short the City of Angels and go long on the Big Apple, or vice versa. Homeowners in bubbly markets could hedge against a pop. They could stand to gain if the value of their homes go down. If property values keep rising, of course, the homeowners lose on their MACRO investments -- but at least their homes would be worth more.

The article states that MACRO Securities has filed plans for the new securities with the SEC, and hopes to list the securities on the American Stock Exchange.

You knew you could rely on SLW to hunt down the URL for the GAO's report on the SEC ASAP? Right?

A GAO audit of the SEC released yesterday found, ironically, that the "SEC did not have effective internal control over financial reporting (including safeguarding of assets)...."  (In fairness to the SEC, the GAO also found that the SEC's financial statements for the 2004 fiscal year were "presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles" and that there was "no reportable noncompliance with laws and regulations we tested.").

This amusing article in the San Jose Mercury News discusses the "bittersweet irony" at work here:

That the SEC had to disclose three "weaknesses" will probably be a bittersweet irony for the hundreds of valley companies that file their financial reports for SEC approval. Many of them have been loudly decrying the cost and burden of new requirements to document and test such controls, while getting only minimal relief from the SEC.

"This will probably give people in public companies a lot of emotional satisfaction, seeing the SEC hoisted on its own petard," said Bill Sherman, a corporate lawyer with Morrison & Foerster in Palo Alto.

Asked by reporters on a conference call if it was embarrassed to have failed standards it enforces every day, the SEC reacted like many of the dozens of companies that have reported material weaknesses -- by focusing on the positive.

"We feel the process was a healthy process," said Peter Derby, the SEC's managing executive for operations, noting that the SEC was fixing the problems.

Other executives say they'd laugh at the irony if they weren't still crying over the multimillion-dollar cost and thousands of hours required to document and test their controls -- made mandatory in the 2002 corporate crackdown law known as Sarbanes-Oxley. "It's amusing," said Bryan Stolle, chief executive of Agile Software.

"But the damage and the pain is so high, it's a shame."

According to this article in the Star-Ledger, Vermont high school teacher Chaim Lodish, proud owner of 100 shares of Able Laboratories, recently became a player in the securities litigation arena when he got a telephone call from a suburban Philadelphia law firm.  Lodish told the Star-Ledger he has no idea how the firm got his name, but he "ended up" as the plaintiff in a securities class action filed yesterday in federal court in Newark (complaint available here).  The article states that Lodish

was caught up in a standard "dialing for dollars" campaign of a small group of lawyers around the country who specialize in potentially lucrative pharmaceutical stockholder and product liability lawsuits.

"That's a good question," Lodish said last night. "I don't know how they found out I own stock."

Lawyers comb proxy mailing and other public sources in a fierce competition to sign the biggest group of stockholders. The goal is to become designated the lead law firm, assuring them huge legal fees and a piece of any monetary award.

The PCAOB's Division of Enforcement brought its first enforcement action today, revoking one firm's registration and disciplining three accountants for their "failure to cooperate."

As discussed in this press release, PCAOB

revoked the registration of a public accounting firm and barred the firm's managing partner from association with a registered accounting firm after finding that they concealed information from the Board and submitted false information in connection with a PCAOB inspection.

The Board also censured two former partners in the firm, finding that they participated in the misconduct but noting that they promptly alerted the PCAOB and cooperated in the Board's investigation.

"Registered accounting firms and their associated persons have a duty to cooperate in PCAOB inspections," said Claudius Modesti, director of the PCAOB's Division of Enforcement and Investigations. "The findings in this case demonstrate that the Board will not tolerate conduct aimed at thwarting the Board's inspections."

PCAOB's Division of Enforcement is headed up by Claudius Modesti, who joined the PCAOB in May 2004. Mr. Modesti was formerly an AUSA in the Eastern District of Virginia, as well as an attorney in the SEC's Division of Enforcement.

As discussed in this article by the AP, the SEC has suddenly gone from a "flush with cash" situation where it couldn't even spend its entire budget to a serious budget crunch.  According to the article, unplanned cost overruns might total $50 million through fiscal 2007, and the SEC staff was told last week

"to put all nonessential travel, training and conferences on hold, effective immediately. Hiring for all but the most qualified candidates also is on the back burner."

The primary cause of this budget crunch appears to be real-estate cost overruns related to the SEC's move to a new Washington headquarters and its relocation of offices in Boston and New York.  Peter Derby, the SEC managing executive for operations, reportedly stated that higher-than-expected security and building costs for the new offices could run between $48 million and $50 million over the next two-and-a-half years.

When you realize your blog is mentioned in an article entitled, "The Five Dumbest Things on Wall Street This Week," and then you realize that your blog is not included as one of the Five Dumbest Things, it's a great day!

According to this article in the Birmingham News, the standard for a "great day" in the Richard Scrushy case (which was first defined by Scrushy here) continues to plummet.  Prosecutor Colleen Conry now states that

"When you can get up and say your name and you represent the United States in a case like this, it's a great day."

Question: How many former CFOs does it take to convince a jury that the CEO was responsible for a massive financial fraud? 

Federal prosecutors in Alabama are hoping that the answer to that question is "no more than 5."  That's how many former HealthSouth CFOs prosecutors lined up to testify against former CEO Richard Scrushy in the just-completed criminal trial that is now going to the jury.  As discussed in this article in the Washington Post, "all five of the company's former chief financial officers have pleaded guilty and testified that Scrushy was responsible for financial reports that deceived investors."  The article notes that Scrushy's defense was that he was "kept in the dark by duplicitous insiders."

Among other things, the future name of the University of Alabama's Scrushy-Striplin Field may hang in the balance.

The WSJ has this very timely article in today's edition breaking down the three-ring-circus that was Morgan Stanley's effort to collect and produce responsive emails to Ronald Perelman in Perelman's high-profile lawsuit against MS. 

The WSJ article has a very detailed account of MS' travails, which reportedly included repeated discovery of additional backup tapes that might include responsive emails.  At one point MS "unearthed 1,423 computer-backup tapes in a closet in a Brooklyn office building."   Later, MS found 129 more tapes sitting on a metal shelf in one of its midtown Manhattan offices.

MS encountered plenty of other problems that the article lays out in detail.  The WSJ article notes that ultimately, the judge became so dissatisfied with MS' response that she ruled that its actions were in "bad faith" and that the jury could simply assume the MS helped defraud Perleman:

...Judge Maass issued a partial default judgment against Morgan Stanley, essentially handing an automatic loss to the Wall Street firm, because "the [discovery] abuses have continued unabated." The judge said she would instruct the jury to assume that the firm had helped defraud Mr. Perelman.

"The prejudice to [Mr. Perelman's side] from these failings cannot be cured," she wrote. "The judicial system cannot function this way."

Judge Maass stopped short of granting the default judgment in full. She ruled Mr. Perelman must prove he lost money on the transaction and that he relied on information provided by Morgan Stanley or Sunbeam in making his investment.

When the trial opened in early April, Judge Maass read the nine-person jury a lengthy statement, saying, in part: "Morgan Stanley participated in a scheme to mislead [Coleman] and others and cover up the massive fraud at Sunbeam until Morgan Stanley and Sunbeam could close the purchase of Coleman."

Not surprisingly, the jury appears to have found the judge's instruction pretty persuasive:  Bloomberg reports that this afternoon, a Florida state jury awarded Perelman $604.3 million in compensatory damages on his claims that Morgan Stanley defrauded him as part of the 1998 sale of his controlling stake in Coleman Co. to Sunbeam Corp.  Next the jury must decide whether to award punitive damages.

MS issued a statement this afternoon vowing to appeal:

"The verdict, while disappointing, is not surprising, given the unprecedented and highly prejudicial rulings imposed by the trial judge," the company said in a statement. "Morgan Stanley was not permitted to defend itself on the merits. As a result, the jury heard allegations, instead of true facts, and Morgan Stanley was denied a fair trial. Far from being part of the Sunbeam fraud, Morgan Stanley was a victim of that fraud, losing $300 million when Sunbeam collapsed, one of the many true facts that the jury was not allowed to hear."

As widely anticipated, the SEC announced today that Linda Chatman Thomsen has been named as the new Director of the Division of Enforcement.   According to the SEC's press release, Ms. Thomsen has been at the Commission since 1995 and has served as the Division's Deputy Director since 2002.  She succeeds Stephen M. Cutler, who announced last month that he would leave the Commission to rejoin the private sector.  The Washington Post noted in this article that Ms. Thomsen will be the first woman in the SEC's 71-year history to hold the Director of Enforcement position.

A November 2004 WSJ profile of Ms. Thomsen that was part of its "50 Women to Watch" report is available here.

In this article entitled, "CEO Blogs And Why They Won't Happen," the author argues that those waiting for "a high-powered CEO to enter the so-called blogosphere" should just "keep waiting" because it isn't going to happen anytime soon:

CEOs would have to defy their company's policies on transferring information to the public. And what corporate chief would want to jeopardize a job with a rich compensation package and lavish perks just to talk candidly in a blog?

A CEO blog would be a lose-lose prospect. The blogosphere opens one up for unrelenting criticism. CEOs used to hearing the words "Yes, ma'am" from underlings may not be able to handle the vitriol a group of anonymous commenters could post.

And finding a balance between posting too much or too little corporate information would be near impossible. Perhaps one day as today's CEOs move on to the golf course we'll see one or two take the helm of a Wal-Mart or a GE and start a blog of their own.

But it won't be today.

As discussed in this post, however, the day of the high-profile executive blog is already upon us.  Granted, the blogs discussed in that post from top executives at General Motors (Vice Chairman), Boeing (Vice President), and Sun Microsystems (President) were not CEO blogs, but as the many dozens of blogs popping up daily on the CEOBlogList would seem to indicate, a high-profile CEO blog almost certainly will happen, and soon.

The May 2005 issue of CFO Magazine has an interesting cover story entitled, "What Does Your CEO Really Know?".  A survey of more than 300 CFOs revealed that

"A full 31 percent of public-company CFOs said that before the passage of the Sarbanes-Oxley Act in 2002, their CEOs might have been ignorant of major financial fraud in their companies. Only 49 percent said that would have been impossible. Twenty percent were unsure."

The survey also found that that only 14 percent of these CFOs said their CEOs could still be unaware major financial fraud today following the passage of Sarbanes-Oxley; 71 percent of CFOs believed that in the wake of Sarbanes-Oxley it would be impossible for their CEOs to remain ignorant of major financial fraud; and 14 percent were unsure.

Just as the self-proclaimed Worldwide Leader in Sports has its "ESPN Instant Classic," SLW hereby introduces our first "SEC Instant Classic"--the so-called "Fraudulent Wrong Number Stock Tip." 

The SEC announced today that it had filed

civil charges against two voicemail broadcasters and their associates for broadcasting hundreds of thousands of fraudulent "wrong number" stock tip messages. The messages, which were left on telephone voicemail recording machines throughout the country, were designed to make each recipient believe the caller had dialed the number by mistake. Many of the messages were left by a woman calling herself "Debbie," and sounded as if she had misdialed when calling a friend to pass along a hot stock tip.

A couple reasons why this one is an SEC Instant Classic:

1.  You can play along at home and listen to one of the fraudulent calls by clicking here.

2.  Strong originality by the alleged perpetrators.  Indeed, even the SEC had to acknowledge their resourcefulness and inventiveness in its litigation release:

"The cases filed today demonstrate that even when fraudsters are resourceful and inventive in misusing new technologies, the Commission can be equally resourceful and inventive when it comes to tracking them down and stopping them."

3.  The money allegedly made it's way to the defendant through a drop ultimately involving $40,000 cash, a blue duffel bag, and a Gulfport, Mississippi casino.

4.  The "Sorry I'm eating but I'm starving" line thrown into almost all of the "wrong number" calls, apparently designed to further comfort wary, wannabe insider traders into believing that they were receiving an accidental, versus intentional, wrong number stock tip.

It's just good stuff all around.  Kudos to the SEC for having the resources to track down these jokers.

A not-insignificant problem for lawyers who would try to get around an SEC order permanently suspending them from appearing or practicing before the Commission is that if they try, they necessarily wind up appearing or practicing before, well, the Commission.  Which means they would wind up filing things directly with the entity with which they are enjoined from filing anything. 

Perhaps not surprisingly, the risks inherent in such a strategy seem to deter most would-be violators.  But not all, according to the SEC.

SLW is back in action.

The following article appeared in the May 2005 SCAS Alert:

Presenting the SCAS 50 for 2004
By Bruce T. Carton, Vice President, ISS' Securities Class Action Services

This month's Securities Class Action Services Alert includes ISS' annual "SCAS 50" report. The SCAS 50 for 2004 lists the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class-action settlements occurring in 2004 in which the law firm served as lead or co-lead counsel.

Topping our list for 2004 in more ways than one was Bernstein Litowitz Berger & Grossman, which served as lead or co-lead counsel in final settlements totaling $3.466 billion. Notably, Bernstein Litowitz had a hand in well over one half of the record $5.98 billion in securities class-action settlement dollars obtained in 2004. Rounding out the Top 5 in our SCAS 50 were Barrack, Rodos & Bacine ($2.888 billion), Milberg Weiss Bershad & Schulman ($900 million), Chitwood & Harley ($583 million), and Berman DeValerio Pease Tabacco Burt & Pucillo ($578 million).

Bernstein Litowitz also led the way in terms of average settlement amount for firms that served as lead or co-lead counsel in at least five settlements in 2004. Its average settlement of over $288 million was quadruple that of Chitwood & Harley, the second- ranked firm in this category with an average settlement amount of over $72 million.

With respect to the total number of final settlements, Milberg Weiss Bershad & Schulman led with 43 settlements. This was more than double the number of settlements obtained by the next firm in this category-- Schiffrin & Barroway, which was lead or co-lead counsel in 21 settlements. Other law firms with at least 10 settlements in 2004 included Lerach Coughlin Stoia Geller Rudman & Robbins (14), Berger & Montague (13), Bernstein Litowitz (12), Stull, Stull & Brody (11), and Berman DeValerio (10).

A printable copy of the SCAS 50, including details on our methodology, is available in PDF format here.

The SCAS 50 is published on an annual basis, and we welcome your feedback.