Compliance May 14, 2009

Jury Convicts Former Monster Exec in Options Backdating

A federal court jury in New York has convicted James Treacy, former chief operating officer of employment Web site Monster Worldwide, of defrauding investors through improper stock option backdating.
Reported by

A Bloomberg news report said the verdict—guilty on charges of securities fraud and conspiracy—came after a four-week trial and four hours of jury deliberations. The report said Treacy faces a jail term of as much as 25 years.

Prosecutors said Treacy backdated option grants by “papering” them as if they’d occurred on dates in the past when Monster’s stock price was at or near a periodic low point. None of those grants were accounted for as a compensation expense, as the law requires, prosecutors alleged.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

According to the Bloomberg story, Treacy received more than 450,000 options on six dates from 1997 to 2001 and earned more than $24 million.

Others Decisions?

The news account said Treacy’s lawyers argued during the trial that Treacy’s options decisions were based on decisions by other Monster executives. The other Monster executives decided when to make the options awards and Monster finance officials figured out how to account for them, Treacy’s lawyers contended.

“This verdict brings us closer to the end of an unfortunate chapter in the company’s history and putting the issue firmly behind us,” Steve Sylven, a Monster spokesman, said in a statement, according to Bloomberg.

Bloomberg said Monster reported in 2001 that its net income was $69 million when it was really $3.4 million after options expenses were recorded, prosecutors said (see “SEC Slaps Former Monster Execs with Options Backdating Charge’). The company said in December 2006 that it had overstated earnings by $271.9 million in the previous nine years because of improperly recorded option grants. Prosecutors said the company understated compensation by $339 million

At least 225 companies have disclosed internal or federal probes involving options irregularities, and more than 140 have said they would restate financial results, according to the report.

Compliance May 14, 2009

SEC Proposes Tighter Adviser Custody Rules

The Securities and Exchange Comission (SEC) today proposed tighter rules for investment advisers who custody assets.
Reported by

In light of fraud of money managers such as Bernard Madoff, the SEC voted 5-0 to propose that investment advisers who hold their client’s assets undergo a surprise exam once a year to make sure those assets exist, Reuters reported.

If adopted, the amendments to the Investment Advisers Act of 1940 would require investment advisers having custody of client funds and securities to obtain a surprise examination by an independent public accountant, and, unless the client assets are maintained with an independent custodian, obtain a review of custodial controls from an independent public accountant, according to the SEC.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

The surprise exam would apply to about 9,600 of the approximately 11,000 registered investment advisers (RIAs) and includes advisers who are deemed to have custody or the ability to deduct fees from their client’s assets, according to Reuters.

The SEC also proposed requiring about 360 investment advisers who physically hold their client assets in the firm or through an affiliate to undergo a written review by a certified public accountant, the news report said. The review would describe the controls the adviser has in place, test the operating effectiveness of those controls, and provide the results of those tests. That review would have applied to Madoff.

“We are taking this action in response to major investment scams such as Madoff and many other potential Ponzi schemes,” SEC Chairman Mary Schapiro said at the SEC meeting, according to the news report. “A surprise exam would provide another set of eyes on client’s assets and provide additional protection against theft or misuse.’

The proposed SEC plan is open for public comment.

«