The week in GRC: Janet Yellen sticks up for post-financial crisis regulation, Amazon’s takeover of Whole Foods approved by FTC
– A total of 131 class-action securities suits were filed in federal court in the first six months of the year, a historic high, according to data from Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse (SCAC), the Wall Street Journal reported.
The volume, which doesn’t include suits challenging mergers and acquisitions, is higher than in any equivalent period since the SCAC began tracking data in 1996, after the passage of landmark securities-litigation legislation. Under securities laws, investors can sue to recoup losses after a stock drops by proving a company or its employees fraudulently misstated or withheld information that would have been material to buying or selling shares.
Industry watchers say the rise is being driven by enterprising plaintiffs’ firms bringing a higher number of arguably weaker cases under the perceived strategy that companies will settle early to make a case go away. Advisers are alerting clients that in the current era, every company, from small-cap firms to corporate giants, needs a plan for defending against fraud accusations after investor losses.
– The SEC recently met with Spotify executives to examine the music streaming company’s plans to skip an IPO and list directly on the NYSE, Bloomberg reported. A direct listing would avoid underwriting fees and restrictions on stock sales by current owners. Spotify would be the largest company to complete a direct listing and the first on the NYSE. The SEC declined to comment to Bloomberg about the nature of its meeting with Spotify.
– Blackrock and State Street supported management in 97 percent and 94 percent of say-on-pay votes, respectively, up to June 30 this year, according to Reuters, reporting on data from Proxy Insight. The continued strong support helps explain how CEO pay keeps rising – part of a broader debate over inequality – even as large corporations changed their stances on climate and social issues under pressure from investors.
BlackRock, for instance, has already disclosed it switched sides and helped pass a measure on climate risk reporting at ExxonMobil Corp’s annual meeting in May. State Street says it voted against directors at 400 companies this year that had no female board members and showed no signs of changing, part of a campaign for gender diversity that also included the placement of the famed ‘Fearless Girl’ statue on Wall Street.
– Herbalife plans to repurchase up to $600 million of its shares over the next month following executives stating on Monday that discussions about taking the company private ended last week, the WSJ reported. Herbalife will repurchase its stock for between $60 and $68 per share – a 9.8 percent premium at the high end from Friday’s closing price of $61.95. Shareholders that participate in the offer will be eligible to receive a per-share cash payment if the company is taken private within the next two years. Herbalife reached a $200 million settlement with the Federal Trade Commission (FTC) last year amid allegations it misled its customers.
– BHP Billiton announced it was looking to sell its onshore US oil and gas operations following months of pressure from activist hedge fund Elliott Management, according to the WSJ. Elliott had questioned the fit between BHP’s petroleum division and mining of iron ore, copper and other minerals, calling for sweeping changes including spinning off the shale business, launching an independent review of BHP’s global petroleum operations, and collapsing its dual British-Australian structure around a single main listing in Sydney.
BHP said it would complete well trials, swap some acreage and look at ways to increase the value, profitability and marketability of its extensive shale operations. BHP holds more than 838,000 acres in the shale-rich Eagle Ford, Permian, Haynesville and Fayetteville regions of the US.
– Compensation committees are relying on faulty performance metrics that inflate executive pay, the WSJ reported. Shareholders vote to approve the recommendations of the compensation committee in more than 97 percent of cases, but are being misled to due to the use of ‘adjusted’ earnings, rather than GAAP. Regulations state that companies must report GAAP figures on earnings releases, but not in compensation reports.
In 2015, 93 companies in the S&P 500 announced adjusted earnings that were more than 50 percent above their GAAP earnings. At most of these firms the compensation committees set executive pay using the adjusted earnings without quantifying how they differed from GAAP metrics.
– Activist investor Carl Icahn stepped down from his role as special adviser to President Donald Trump on regulatory reform, the Washington Post reported. Icahn said he was stepping down to avoid conflicts of interest over regulations that affect an oil refining company he owns. In May five Democratic members of the Senate asked the Environmental Protection Agency for information about Icahn’s business interests but he denied any conflict.
In his resignation letter to Trump, Icahn expressed a wish that the two men had found more time to spend discussing regulatory reform. ‘I sincerely regret that because of your extremely busy schedule, as well as my own, I have not had the opportunity to spend nearly as much time as I’d hoped on regulatory issues,’ Icahn wrote.
– Blue Apron instituted a hiring freeze and cut several jobs from its recruiting team this week following challenges around its ability to attract investors, TheStreet reported. The meal-kit delivery service company offered three tiers of shares at its IPO earlier this year, including a tier of non-voting-class shares. Since then, the FTSE Russell has moved to exclude companies that offer shares with limited voting rights. MSCI, the company behind the S&P 500, is also reviewing whether it will allow companies to list with restricted voting rights.
‘Exclusion is a big deal because many big index funds, exchange-traded funds, index funds and public pension funds invest passively following major indices, such as the Russell 3000. As a result, major institutional investors including big pension funds won’t invest in companies that aren’t part of the indices,’ wrote Ronald Orol of TheStreet.
– In an attempt to drive corporate tax cuts, US businesses are building public support by educating their employees about the issue, with the help of Kevin Brady (R-Texas), chairman of the Ways and Means Committee, the WSJ reported. The Business Roundtable, an association of CEOs that has taken out television ads and paid Washington lobbyists to champion the issue, is inviting senior lawmakers to its facilities this summer to encourage employees to lobby their local Congressmen about tax reform.
This week Brady appeared in front of employees at UPS, Brown-Forman, Best Buy, AT&T, Intel and Boeing, according to the WSJ. ‘You leave tax reform to Washington, it won’t get done,’ he told an audience at UPS.
Companies and Republicans argue that corporate tax cuts would help workers because they would encourage productivity-boosting investments and lead to wage growth in the long run. Treasury Secretary Steven Mnuchin said on Monday that most economists think labor pays 80 percent of the corporate tax. Official estimates by the congressional Joint Committee on Taxation and the Treasury Department point in the opposite direction, showing that owners of capital pay 75 percent to 82 percent of corporate taxes.
– The deregulation winds blowing through Washington could add $27 billion of gross profit at the six largest US banks, lifting their annual pretax income by about 20 percent, according to Bloomberg. JPMorgan Chase & Co and Morgan Stanley would benefit most from changes to post-crisis banking rules proposed by the Trump administration, with pretax profit jumping 22 percent, according to estimates by Bloomberg based on discussions with analysts and the banks’ own disclosures. Goldman Sachs Group would have the smallest percentage increase, about 16 percent.
Bloomberg’s calculations are based largely on adjustments banks could make to the mix of securities they hold and the interest they earn from such assets. The proposed changes would allow the largest lenders to take on more deposits, move a greater portion of their excess cash into higher-yielding treasuries and municipal bonds, and issue a lower amount of debt that costs more than customer deposits. Three others could also boost income: counting municipal bonds as liquid, or easy-to-sell, assets; requiring less debt that won’t have to be paid back if a bank fails; and making it easier to comply with post-crisis rules.
– The New York Post reported that hedge fund Third Point may have taken a position in United Technologies’ stock. While both Third Point and United Technologies declined to comment, an unnamed banker close to the situation told the New York Post: ‘I know there’s a lot of pressure on United Technologies at the moment.’
Some analysts and activists argue that United Technologies would be worth at least 10 percent more if broken into pieces. Some suggest in particular that the firm’s Otis Elevator unit, which also makes escalators, is ripe for a spinoff. In an August 7 analyst report, JPMorgan said the Otis division deserves to be trading at a higher valuation than the company’s aerospace assets.
– Brazilian state-run company Petrobras has temporarily suspended João Adalberto Elek, director of compliance and governance, the WSJ reported. Elek awarded a no-bid contract with $8 million to Deloitte so that the auditing company could investigate tips that came in through Petrobras’ corruption hotline. Deloitte, however, was in the process of hiring Elek’s daughter – a potential conflict of interest that was flagged up through Petrobras’ corruption hotline.
A Brazilian government ethics committee decided this was a conflict of interest, leading to Elek’s suspension while he appeals the decision. Petrobras has been working to clear its name following the massive Operation Car Wash scandal, which played a part in the impeachment of former president Rousseff last year.
– Amazon’s takeover of Whole Foods was approved by the FTC and Whole Foods’ shareholders this week, according to the WSJ. The FTC had been conducting an initial review of the deal to see whether it might raise any concerns about competition. The commission had the option of examining the transaction in more depth – a move that has been called for by some Democratic lawmakers, labor and consumer groups – but the FTC instead decided further scrutiny wasn’t warranted. ‘Based on our investigation we have decided not to pursue this matter further,’ said Bruce Hoffman, acting director of the FTC’s bureau of competition.
– ExxonMobil has misled the public for decades about the danger of climate change, according to a peer-reviewed study, the Guardian reported. The study reviewed nearly 200 company documents spanning two decades, many of which acknowledged the dangers of climate change, and noted the difference in tone in hundreds of paid-for editorials in major US newspapers during the same time. The new study was published on Wednesday in the journal <I>Environmental Research Letters</I>. Geoffrey Supran, a researcher at Harvard University and co-author of the study, said: ‘Using social science methods, we found a gaping, systematic discrepancy between what Exxon said about climate change in private and academic circles, and what is said to the public.’
Both findings are relevant to ongoing investigations by state and federal attorneys general, along with the SEC, on whether the company deceived investors on how it accounts for climate change risk. Exxon spokesperson Scott Silvestri called the latest study ‘inaccurate and preposterous’ and said the researchers’ goal was to attack the company’s reputation at the expense of its shareholders. ‘Our statements have been consistent with our understanding of climate science,’ he said.
– Legal hostilities continued to escalate between former Uber chief executive Travis Kalanick and Uber investor Benchmark Capital, according to Reuters. Benchmark started legal action against Kalanick two weeks ago, in an attempt to remove him from the Uber board and end his ability to appoint three new board members so that he can’t be the decisive player in the search for his successor. Kalanick dismissed the lawsuit as a ‘public and personal attack’ last week, but Benchmark resurfaced this week, labelling Kalanick a ‘corrosive influence’.
Kalanick was forced to resign as Uber CEO in June, when shareholders representing about 40 percent of the company’s voting power signed a letter asking him to step down following a succession of scandals at the company ranging from sexual harassment to evading regulation by some local authorities. Kalanick remains on the board and is involved in the company’s search for a new CEO.
Benchmark’s August 10 lawsuit says Kalanick ‘committed fraud’ by concealing a range of misdeeds from the board when last year he requested that the board add three seats that he would have the sole right to appoint. Board members, including Benchmark, approved. The lawsuit says the firm never would have approved the request had it known certain things it believes the CEO was hiding at the time, including details of an alleged theft of trade secrets that has led to a high-stakes legal fight with Alphabet’s Waymo self-driving car unit.
– Federal Reserve chair Janet Yellen defended the new post-financial crisis regulations, amid ongoing suggestions from Trump and his aides that they should be rolled back, The Washington Post reported. ‘The evidence shows that reforms since the crisis have made the financial system substantially safer,’ Yellen told an annual gathering of central bankers, finance ministers and economists on Friday.
In 2008 the Bush administration and Congress passed a law that allowed the government to inject money into the banking system to try to[NEVER ‘try and’!] arrest the crisis. In 2010 the Obama administration and Congress passed a law that imposed new consumer protection rules, required banks to hold bigger cushions against losses, put new limits on their ability to take risk and tried to establish a process to help wind down large financial companies.
Trump has said these changes went too far, calling the law a ‘disaster’ that has made it hard for consumers and businesses to access credit and restricted economic growth. One of his arguments, supported by many banks, is that requiring banks to hold more capital to cushion against losses makes it harder for them to lend money. Yellen addressed these criticisms head-on in her speech, saying research is mixed but that Fed officials believed there were ‘sizable net benefits to economic growth from higher capital standards’.
– James Damore, the former Google engineer who was fired for writing an internal memo criticizing the company’s diversity hiring policies, has hired a lawyer who is a former member of the Republican National Committee, according to Reuters. Damore was fired by Google after he wrote a memo saying the lack of female leaders in the tech industry was due to biological differences. He has not sued Google since his dismissal, but did submit a charge to the US National Labor Relations Board (NLRB) accusing Google’s management of trying to shame him into silence. Harmeet Dhillon, a member of the Republican National Committee, has been hired to represent Damore in that matter, the NLRB website said.
– Charles Ross-Stewart, Citigroup’s head of compliance in Europe, the Middle East and Africa has resigned from his position, Financial News reported. Ross-Stewart joined Citi in 2012 and had previously served as head of compliance for EMEA at UBS. Citi has appointed an interim compliance head and will name a permanent replacement in due course, a spokesperson said.
As banks grapple with the impact of Mifid II, Financial News pointed out that Ross-Stewart is the third notable compliance professional to step down from a role at a bank in recent weeks. Katie Smith resigned from her role as global head of compliance at Deutsche Asset Management earlier this week, while Joanna Redgrave, a compliance officer at JPMorgan, also recently handed in her notice at the bank.