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JIM BROWN, Individually and on Behalf ) CASE NO: 2:06-cv-03731-GHK-SH of All Others Similarly Situated, Plaintiff ) ) CLASS ACTION ) Plaintiff, ) MEMORANDUM OF POINTS AND v. ) AUTHORITIES IN SUPPORT OF ) MOTION FOR 60(a) BRETT C. BREWER, ) et. al., Defendants ) ) Defendants ) )) DATE: TBD TIME: TBD COURTROOM: Honorable George H. King ROOM: 650


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF CONTENTS IIIIIIIVINTRODUCTION FACTUAL BACKGROUND LEGAL STANDARDS AND ARGUMENTS RELIEF pg pg. pg. pg. 4 4 5 7


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CASE LAW CITED Mich.Court Rules Ann. (Searl, 1933) Rule 48, §3; 2 Wash.Rev.Stat.Ann. (Remington, 1932) §464(3); Wyo.Rev.Stat.Ann. (Courtright, 1931) §89–2301(3)

pg. 5


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MEMORANDUM IN SUPPORT OF MOTION FOR RELIEF UNDER 60(a) I 1. INTRODUCTION Petitioner Brad Greenspan seeks relief under Rule 60(a) from the Court’s November 29,

2011 order Denying petitioner’s November 16, 2011 motion to vacate the October 2010 motion to ban petitioner. Rule 60(a) permits a court to “correct a clerical mistake or a mistake arising from oversight or omission whenever one is found in a judgment, order or other part of the record.” II FACTUAL BACKGROUND

1. On 10/25/2011 Petitioner filed several pleadings including a MEMORANDUM of Points and Authorities in support of motion for relief from judgment under FRCP 60(b)3. 2. On 11/7/2011, Defendants filed a “Joint-Motion” titled, “NOTICE OF MOTION AND Joint MOTION to Strike MOTION for Order for Fraud Upon The Court 60B3” 3. In such 11/7/2011 motion, defendants noticed several deficiencies with the 10/25/2011 Pleadings filed by Petitioner. 4. Its uncontested that the defendants did not file any other motions after the 11/7/2011 motion to strike and before the Court’s 11/29/2011 ruling granting Joint Motion. 5. The 11/7/2011 motion asked the Court to strike the “60b3” motion which on page 12 of Its memorandum it cited was, “(73 pgs total; memo of points &authorities 57 pgs)” 6. One of specific deficiencies noted by defendants in their 11/7/2011 Joint Motion was such Memorandum for the 60b that Petitioner filed on 10/25/2011 was too many pages. 7. Petitioner replied to the 11/7/2011 Joint Motion thru the filing of the 11/15/2011 “Notice of Errata” which inputted into the Court “Corrected” and revised pleadings including a “Motion for Fraud Upon the Court”. 8. The Court on 11/16/2011 made the following ruling:
“Mr. Greenspan's "Motion for Summary Judgement or Adjudication," "Memorandum of Points and Authorities in Support of Motion to Intervene," "Memorandum of Points


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and Authorities in Support of Motion for Relief From Judgment Under FRCP 60(b)," and "Notice of Errata," which have been received by the Court, but not filed, are hereby deemed filed as of the date they were received IT IS SO ORDERED by Judge George H. King”

9. The Petitioner’s “Memorandum of Points and Authorities in Support of Motion for Relief From Judgement Under FRCP 60(b)” that the Court accepted and deemed filed on 11/16/2011 Is a different document then the similar titled Memorandum defendants cite in their Joint Motion on 11/7/2011. 10. For instance, the “Errata” included memorandum he Court cites on 11/16/2011 and accepts conforms to the 25 page rule which defendant’s complaint and cite is the deficiency of the 10/25/2011 Memorandum 11. In addition, the 11/16/2011 “Errata” included memorandum also fixes a deficiency which had omitted certain sections including sections and citings that specify and request relief under “60(b)(4)”. 12. The deficient 10/25/2011 memorandum of Petitioner has no reference and is missing the citations of “60(b)(4)”. 13. As evidence of this, Petitioner submits that in the 11/16/2011 Court accepted and final Version of the Memorandum for relief, the final section of the document reads, “VRELIEF Substantial Justice Will Be Served by Granting this Motion under 60b, 60b1, 60b2, 60b3, 60b4, or 60b6,” Whereas, a fact finder can review the 10/25/2011 memorandum which is the only memorandum the Defendant’s 11/7/2011 Joint Motion responds to, reads, “VI- RELIEF Substantial Justice Will Be Served by Granting this Motion of 60b6, 60b3, 60b:” 14. Therefore, defendant’s Joint Motion filed on 11/7/2011 has failed to address or opposed the Petitioner’s Relief requested under his motion for 60(b)(4) made and accepted by the Court on 11/16/2011. III LEGAL STANDARDS AND ARGUMENTS:


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Rule 60(a) permits a court to “correct a clerical mistake or a mistake arising from

oversight or omission whenever one is found in a judgment, order or other part of the record.” See Mich.Court Rules Ann. (Searl, 1933) Rule 48, §3; 2 Wash.Rev.Stat.Ann. (Remington, 1932) §464(3); Wyo.Rev.Stat.Ann. (Courtright, 1931) §89–2301(3). 2. The Court should correct its 11/29/2011 ruling after review of the facts cited And discussed herein and that are part of the historical record. The 11/29/2011 ruling should Grant Petitioner’s motion for relief under 60(b)(4) and vacate the October 19, 2010 motion to ban. Petitioner’s motion for relief under 60(b)(4) was unopposed by Defendants in their 11/7/2011 Motion to strike. Defendant’s also had ample opportunity to file a supplement or reply of its Motion to Strike after the Court ruled on 11/16/2011 it was accepting the “Errata” pleadings. 3. The Court should as a further reason to correct its 11/29/2011 ruling note that its 11/16/2011 ruling put no burden or demand on Petitioner to make a 2nd Reply in addition to the “Errata” reply made and accepted on 11/16/2011. This is because the Court in its 11/16/2011 ruling specifically cited the instructions, “The Greenspan Motions and the Joint Motion are hereby TAKEN OFF CALENDAR and
will be taken UNDER SUBMISSION without oral argument on December 5, 2011. Fed. R. Civ. P. 78; Local Rule 7-15. It is logical that we consider the Joint Motion before we consider the Greenspan Motions, and thus we will not issue any orders on the Greenspan Motions pending our decision on the Joint Motion. No appearance by counsel shall be necessary. The hearing dates are VACATED. Further briefing, if any, shall be filed in accordance with the Local Rules as if the noticed hearing dates had not been vacated.”

Such Ruling on 11/16/2011 (see above) included the key directions “Further briefing, if any, shall be filed”. Therefore, Petitioner took the wording in the ruling “if any” to be a clear ruling by the Court that any future “briefing” Petitioner determined to make would be solely at the option of the Petitioner or Defendants and not required for the Court to make a ruling based on the merits of the pleadings accepted thru the date of 11/16/2011. This understanding of the Court’s ruling on its face coupled with the fact Petitioner had: i) just replied to the defendant’s motion to strike thru filing pleadings to correct the very deficiencies the defendants cited in their 11/7/2011 Joint Motion motion to strike. And ii) The defendants in their Joint Motion had not opposed the Petitioner’s Motion for relief under 60(b)(4), is why the Petitioner did not file an additional Reply after the 11/16/2011 Ruling by the Court after the Petitioner’s reply and filing on 11/15/2011. 6

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Petitioner also asks Court to correct its 12/21/2011 Order in which the Court

Ruled, “Rule 701 Declaration submitted by Plaintiff Brad Greenspan received on 12/6/11 is not to be filed but instead rejected.” In fact, the Court had accidentally combined a copy of the Rule 701 Declaration that was Part of a Motion for Judicial Notice. This Copy of the Rule 701 Declaration was being used as an exhibit to the Motion for Judicial Notice. An error on the filing process has effectively put the
December copy of the Rule 701 Declaration on top of the Motion for Judicial Notice which was signed By Petitioner. In fact, the original Rule 701 Declaration was filed on 10/25/2011 with all its exhibits included and received by the Court and Defendants. In fact, the Defendants acknowledge receipt of this 10/25/2011 version of the Rule 701 Declaration and did not dispute a deficiency such as the document not being signed. Defendants cite the 289 page document as having been received on page 14 of their Motion To Strike filed 11/17/2011 (Document #368). Defendants neither take issue with the Rule 701 Declaration as being deficient from not being signed nor do Defendants seek to strike the Declaration in their Order or motion. Defendants simply note its existence. Therefore, the Court should note the confusion caused by a second unsigned version of the Rule 701 Declaration that did not contain the exhibits being used by Petitioner in a December Motion of Judicial notice. The Court should therefore vacate its 12/21/2011 Ruling on the second 701 Declaration because the original Rule 701 Declaration that was 289 pages including exhibits was already accepted by both the Court and Defendants when it was received on 10/25/2011. Defendants had their chance to cite it in their motion to strike as being deficient and they both do not seek to strike the Rule 701 Declaration nor do they cite as a deficiency that such 10/25/2011 Rule 701 Declaration is unsigned.


Substantial Justice Will Be Served by Granting the Relief requested by Petitioner under Rule 60(a) to correct its Rulings and Orders made on 11/29/2011 and 12/21/2011. First, The 11/29/2011 ruling should be corrected to grant Petitioner’s unopposed motion for Fraud upon the 7

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Court and other requests including to vacate the October 19, 2010 motion to ban Petitioner under 60(b)(4), because defendant’s Joint Motion does not oppose the 60(b)(4). If the Court determines Defendants are able to strike motions to vacate they have not responded to which would be Surely inequitable then Petitioner has provided a further reason to grant relief to Petitioner, the Court should acknowledge that Petitioner had replied to the Joint Motion and that the Court’s ruling on 11/16/2011 acknowledged this fact and instructed Petitoner that further briefing was solely at Petitoner’s option via the “if any” wording of the order. Certainly the Court was not meaning to trick or fool the Petitioner in its Ruling to be the victim of what the Court cites on 11/29/2011 as a requirement to reply of Petitioner and Court’s conclusion Petitioner failed to reply to the Joint Motion, and such failure of Petitioner as the core reason to dismiss the Petitoner’s 11/16/2011 filed and accepted pleadings.


January 18, 2012 respectfully submitted, Brad Greenspan, in Pro Per And on behalf and for benefit of Class and unincorporated association of the MySpace2006 Association which is a group of individual common stock holders that email and update each other periodically since 2005.


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CERTIFICATE OF SERVICE A copy of the foregoing Motion to Intervene was this day placed in the United States mail, postage prepaid and addressed to:
HOGAN LOVELLS US LLP Richard L. Stone, Bar No. 110022 Richard.stone@hoganlovells.com Julie Ann Shepard, Bar No. 175538 Julie.shepard@hoganlovells.com 1999 Avenue of the Stars, Suite 1400 Los Angeles, California 90067 Telephone: (310) 785-4600 Facsimile: (310) 785-4601 ROBBINS GELLER RUDMAN & DOWD LLP Randall J. Baron, SBN 150796 Email: RandyB@csgrr.com David T. Wissbroecker, SBN 243867 Email: dwissbroecker@csgrr.com 655 West Broadway, Suite #1900 San Diego, CA 92101 Telephone: (619) 231-1058 Facsimile: (619) 231-7423 Attorneys for Plaintiff Jim Brown ORRICK, HERRINGTON & SUTCLIFFE, LLP Michael D. Torpey, SBN 79424 Email: mtorpey@orrick.com James N. Kramer, SBN 154709 Email: jkramer@orrick.com James Thompson, SBN __________ Email: jthompson@orrick.com The Orrick Building 405 Howard Street San Francisco, CA 94105-2669 Telephone: (415) 773-5700 Facsimile: (415) 773-5759

Browne George Ross LLP Michael A. Bowse (State Bar No. 189659) mbowse@bgrfirm.com 2121 Avenue of the Stars, Suite 2400 Los Angeles, California 90067 Tel 310-274-7100, Fax 310-275-5697

This, the

day of January 2012,


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Stephen J. Hillman, referral Date filed: 06/14/2006 Date of last filing: 01/30/2012

Doc. No. Dates Description 405 Filed: 01/30/2012 Entered: 01/31/2012 Motion to Intervene Docket Text: NOTICE OF MOTION AND MOTION to Intervene filed by movant James A Nelson. Motion set for hearing on 2/27/2012 at 09:30 AM before Judge George H. King. Lodged proposed order. (bm) 406 Filed: 01/30/2012 Entered: 01/31/2012 Declaration (Motion

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Stephen J. Hillman, referral Date filed: 06/14/2006 Date of last filing: 01/30/2012

Doc. No. Dates Description 405 Filed: 01/30/2012 Entered: 01/31/2012 Motion to Intervene Docket Text: NOTICE OF MOTION AND MOTION to Intervene filed by movant James A Nelson. Motion set for hearing on 2/27/2012 at 09:30 AM before Judge George H. King. Lodged proposed order. (bm) 406 Filed: 01/30/2012 Entered: 01/31/2012 Declaration (Motion


1. contents Sarbanes-Oxley legislation News & Views

U.S. Securities & Exchange Commission Chairman Arthur Levitt: Pres. Bush & Sec. Paulson are rolling back corporate governance standards History & Developments Sarbanes-Oxley - the critics & Hank Paulson Executive Turnover doubles in wake of US Sarbanes-Oxley Legislation Sarbanes-Oxley may effect non-profits Links to Enron & WorldCom Timelines

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orporate governance news articles

Insurer Seeks Shareholder Opinion on Executive Compensation Board Compensation Committee's Face Increasing Criticism Warren Buffett's Succession Plans Spotlight on CEO Compensation CEO Calls Governance Researchers Birdbrains! HP's Governance Woes & Resurgence Governance Issues Arising from Corporate Scandals Sarbanes-Oxley Legislation News & Views Enron Timelines WorldCom Timelines Governance Best Practices - TELUS Governance Page Governance Page

U.S. Securities & Exchange Commission Chairman Arthur Levitt: Pres. Bush & Sec. Paulson are lowering corporate governance standards and rolling back reforms
February 8, 2007. Arthur Levitt, former Chairman of the U.S. Securities & Exchange Commission is sounding the alarm to anyone who will listen. Speaking at a Midtown Manhattan conference of RiskMetrics, Levitt says that US President Bush, Treasury Secretary Henry Paulson, and the Wall Street lobby of big business are rolling back the gains made in corporate governance reform and standards since the enactment of the Sarbenes-Oxley legislation (SOX), legislation enacted in the wake of the Enron and Worldcom disasters where investors lost millions to the greed and fraud of corporate executives. Appointed by Bill Clinton in 1993 Levitt was the SEC's longest-serving chairman, holding the post until 2001.

On the one hand, Levitt and other advocates of shareholder rights are striving to keep the Sarbanes-Oxley Act of 2002 intact. "There are enormously well-funded lobbies doing everything they can to stop your efforts at reform,” Levitt warned his audience of institutional investors representing $8 trillion in assets. Levitt encouraged his audience to keep pushing for corporate governance reform, including the right to nominate their own director candidates, greater access to top executive compensation data, and a greater say on how that compensation is set. "Board elections are exclusively one-party affairs. Proxy fights are prohibitively expensive. As a result an (independent) director has a better chance of being struck by lighting than being elected to a board," he said. However, corporations like Hewlett Packard are slowing making reforms. Following its governance problems, HP is considering changes in its bylaws to enable proxy voting. Levitt was very critical of corporate directors who award chief executive officers huge compensation packages with no justification and no concern for the impact on the rights of shareholders. On the other hand, groups such as the Committee on Capital Markets Regulation, sometimes called the Paulson Commission after the US Treasury Secretary, have complained SOX and the resulting SEC regulation mandated by the legislation harms American competitiveness in world markets, a somewhat hollow complaint given the rise in US equity markets at the same time when the regulations were being enforced. The cause of the big business lobby has found champions in US President Bush and his Treasury Secretary who are working to relax regulations while discouraging shareholder lawsuits. Uncovering the fallacy of the business lobby's stated objections to corporate governance reform, greater accountability

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and shareholder rights, Levitt noted that November 2006 saw the largest number of U.S. IPOs - initial public offerings since 2001, an indication of the growing strength of the US market during the time SOX is being implemented. Sarbenes-Oxley legislation (SOX) critics have pointed to the growth of the London Stock Exchange operating under weaker UK law. Once again Levitt contradicts this claim. He points out that not only are the LSE returns down, but financial fraud at the London Stock Exchange so-called AIM listings. "The bloom is really off the rose of London’s AIM. is up as much as 40%, according to one U.K. accounting firm" says Levitt.


US' Sarbanes-Oxley legislation Background: History & Developments

Updated December 2, 2006. In July 2002, The US Congress passed the Sarbanes-Oxley Act following the Enron and WorldCom scandals, other major corporate bankruptcies and a severe downturn in the US equity market that sent the benchmark US indices to new post September 11 lows. The purpose of the legislation is to prevent fraud, misuse and unauthorized access to any financial information on which public companies base their published financial reports. The Sarbanes-Oxley Act requires public companies to comply with specific auditing, corporate governance and reporting requirements. It also requires executives to certify that corporate financial systems are secure. The legislation authorized the US Securities and Exchange Commission (SEC) to develop the rules and regulations needed to implement the legislation. The SEC has since drafted stringent new rules on disclosing the dating of stock options, pay and perks to corporate executives. These regulations state that U.S. companies have to report each year on the annual pay for chief executives, chief financial officers, and the next three top-earning executives. Critics of the legislation have warned that the legislation will decrease the attractiveness of the U.S. capital markets to foreign issuers. Until Sarbanes-Oxley, foreign private companies raising capital in US markets had different reporting requirements than US companies and the legislation comes close to eliminating these differences. Many foreign companies in the process of making public offerings felt that the rules imposed exceptional burdens on them and chose to make their public offerings in the UK and the rest of Europe rather than the US. In addition, the cost of raising capital is higher in the US because of higher underwriting fees in the US compared with Europe. On August 9, 2006, the SEC responded to the critics and the negative effects the legislation on the capital markets, by granting smaller companies and foreign private issuers a year to comply with Sarbanes-Oxley's internal control reporting and auditing provisions. Earlier, on May 17, the SEC said that it would work with the Public Company Accounting Oversight Board to revise the auditing standards that external auditors must apply when assessing a company's internal controls. The critics, however, maintain that the changes will be insufficient to stem the move away from the US capital market. More Time to Comply with Reporting Requirements but Major Changes Unlikely While critics of the legislation are lobbying hard for changes that will ease the reporting requirements of the legislation, consumer advocates are opposed to the changes, and it is unlikely that the lobbying will succeed. » Top


Sarbanes-Oxley Legislation - The Critics & Hank Paulson

Updated December 2, 2006. Critics: There is an obsession with corporate governance that is hurting business. The US Treasury Secretary takes up their cause. The critics of the Sarbanes-Oxley Legislation - primarily corporate leaders - have spent much of 2006 mounting an assault on the legislation. They say that there is a global obsession with corporate governance that is making many boards of directors risk-averse and overly cautious. Corporate executives and board members fear that the possibility of legal action and even jail time has increased substantially as a result of the legislation.

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The assault on the Sarbanes-Oxley Legislation is closely connected an assault on corporate governance. The critics of the legislation add that corporate governance is becoming 'compliance focused' in approach and this mindset is stifling the entrepreneurial spirit needed to keep industry vibrant and productive. The Sarbanes-Oxley Legislation has put the compensation of corporate executives under close scrutiny, since corporations must now disclose the dating of stock options, pay and perks to corporate executives. InterActiveCorporation (IAC) CEO Barry Diller, whose 2006 compensation is estimated at $295 million, called (on November 27, 2006) corporate governance activists "birdbrains" who are hurting American business. While it is the SEC that is responsible for developing the reporting requirements under the legislation, the critics have made governance practitioners their whipping boy rather than risk raising the ire of the SEC. They have felt criticism of the SEC, via its regulations, to the US Treasury Secretary, Hank Paulson. US Treasury Secretary, Hank Paulson, is a prominent spokesperson for the critics. At the outset of his appointment, Paulson a former Goldman Sachs chief, in a August 2006 speech at the Columbia Business School, argued for the need to reform the SarbanesOxley Act and relax many of its provisions. While Paulson said "corrective measures to address corporate scandals" "increase investor confidence," he added "often the pendulum swings too far and we need to go through a period of readjustment." "The challenge before us now is how to achieve the right regulatory balance to allow us to be competitive in today’s world while guarding against the recurrence of past abuses." Then, in early November 2006, Paulson said that while the Sarbanes-Oxley Act does not need to be changed, the US government should review and relax the manner in which the rules are being enforced. Paulson was joined by the Committee on Capital Markets Regulation (CCMR) in criticizing the regulations (and indirectly the SEC). The CCMR is headed by Paulson's former colleague at Goldman Sachs: former White House advisor Glenn Hubbard and ex-Goldman Sachs president John Thornton. In a 135-page report, the CCMR said that there is too much regulation and revising the rules under the Sarbanes-Oxley Act would make US markets more attractive. The CCMR concludes that the US should revise the Sarbanes-Oxley Act limit penalties for companies, and reduce costs. » Top


Executive Turnover doubles in wake of Sarbanes-Oxley

August 23, 2006. 17,612 CEO's and vice presidents changed jobs in the first six months of 2006 compared with 7,251 in the same period last year according to Liberum Research . Compliance requirements of the Sarbanes-Oxley legislation and greater share-holder scrutiny are being cited among the reasons. Putting a face to the statistics are present U.S. Treasury Secretary Henry Paulson and Nike's ex-CEO, William D. Perez. Henry Paulson, 60, CEO of Goldman Sachs Group Inc. announced in May 2006 that he was stepping down as CEO to become U.S. Treasury Secretary, (see Sarbanes-Oxley Legislation - The Critics below). Nike Inc.'s CEO William D. Perez, 60, abruptly resigned in January 2006 after being in his job for thirteen months. Differences with company founder and chairman Philip Knight are said to be the reasons for Perez' departure. Knight, who along with Bill Bowerman founded Nike in 1968, had stepped down as CEO on December 28, 2004 at 66, though he continued as "an active chairman." His 35% stake in Nike, reported to be worth $7.4 billion, makes him the 22nd richest American. Nike agreed to pay Perez $4.55 million (2 year's salary worth $2.8 million and bonuses worth $1.75 million), buy his Portland house and reimburse him for remodeling expenses of about $3.6 million. This information was contained in a filing with the Securities and Exchange Commission.

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» Top


Sarbanes-Oxley Legislation May Effect Non-Profit status of Organizations

August 18, 2006. Following the enactment of the Sarbanes-Oxley legislation, Senator Charles Grassley (R-Iowa), a frequent critic of non-profit organizations and Chair of the Senate Finance Committee, held hearings on potential changes in the regulation of non-profit organization. The American Bar Association's Coordinating Committee on non-profit governance issued a report recommending reforms in May 2005 and a further group of interested parties produced a report proposing certain changes to The Panel on the Non-profit Sector in June 2005. One of the suggestions is that the IRS re-qualify organizations for tax exemption every five years. Regardless of whether the recommendations become law, the boards of directors of non-profit organizations everywhere are best advised to take proactive measures in keeping with the principles of good governance contained in the SarbanesOxley legislation, rather than reacting to forced requirements. The boards of all non-profit organizations need to ensure that the non-profits deliver a benefit to the community at large in order to benefit from tax-exempt status. A periodic review of the organization’s mandate and programs for compliance with this principle is good governance practice least the non-profit provide their critics the ammunition they need to eliminate this preferential status.

Richard Lee Stone Jenner & Block LLP 633 West 5th Street Suite 3600 Los Angeles, CA 90071-2054 213-239-5100 213-239-5180 (fax) rstone@jenner.com
ROBBINS GELLER RUDMAN & DOWD LLP Randall J. Baron, SBN 150796 Email: RandyB@csgrr.com David T. Wissbroecker, SBN 243867 Email: dwissbroecker@csgrr.com 655 West Broadway, Suite #1900 San Diego, CA 92101 Telephone: (619) 231-1058 Facsimile: (619) 231-7423 Attorneys for Plaintiff Jim Brown ORRICK, HERRINGTON & SUTCLIFFE, LLP Michael D. Torpey, SBN 79424 Email: mtorpey@orrick.com James N. Kramer, SBN 154709 Email: jkramer@orrick.com James Thompson, SBN __________ Email: jthompson@orrick.com

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The Orrick Building 405 Howard Street San Francisco, CA 94105-2669 Telephone: (415) 773-5700 Facsimile: (415) 773-5759

Browne George Ross LLP Michael A. Bowse (State Bar No. 189659) mbowse@bgrfirm.com 2121 Avenue of the Stars, Suite 2400 Los Angeles, California 90067 Tel 310-274-7100, Fax 310-275-569

European Focus On Sarbanes-Oxley
Daniel V. Dooley*

On July 30, 2002 The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley” or “Act”) became U.S. law; it applies to both U.S. companies and foreign registrants listed on U.S. exchanges. Sarbanes-Oxley has created new legal and regulatory enforcement powers for the U.S. Department of Justice (“DOJ”) and U.S. Securities and Exchange Commission (“SEC” or “Commission”), as well as establishing a new regulatory body, the Public Companies Accounting Oversight Board (“PCAOB”), to oversee independent accounting firms. The eventual “reach” of Sarbanes-Oxley, as to foreign registrants and their auditors, is still to be seen; however, European companies that list their securities on U.S. exchanges already have been affected and must expect more to come – more legal and regulatory enforcement actions, more risk of private securities litigation and SEC regulatory actions, and more rule-making and standard-setting by U.S. regulators. European companies need to focus now on what Sarbanes-Oxley means to them, and what they must do in response to it. This monograph addresses the practical implications for European companies of Sarbanes-Oxley and some key changes in the U.S. securities litigation and regulatory environment.

Sarbanes-Oxley: expands independence requirements for independent auditors and increases the duties and responsibilities of audit committees (of supervisory boards and boards of directors). The Act mandates new “certification” requirements for senior officers, regarding financial statements and other financial information, requires that management report annually on the adequacy and effectiveness of internal controls, and also requires that companies’ independent auditors attest to managements’ assertions in such reports. Sarbanes-Oxley promulgates specific accounting treatments and financial disclosures. And, the Act creates new protections for “whistleblowers” and new obligations for legal counsel regarding potential securities law violations or irregularities. Finally, Sarbanes-Oxley enacts many new or increased civil and criminal penalties and sanctions – applicable to companies and their directors, officers and employees – for various violations of securities laws and regulations. From Sarbanes-Oxley proceed new regulations by the SEC and more vigorous enforcement of U.S. securities laws and regulations, by both the SEC and the DOJ. The Act represents a sea change in securities law and regulation; and, Sarbanes-Oxley will have a profound effect on European companies that access U.S. capital markets and register on U.S. exchanges.

* Daniel V. Dooley, CPA is a partner in the firm of PricewaterhouseCoopers and leads the firm’s Securities Litigation Consulting practice. 1

The purpose of Sarbanes-Oxley is to deter financial frauds and financial accounting and reporting irregularities of the kind that caused some of the recent U.S. corporate scandals, such as Enron, WorldCom, Adelphia, and Health South. The objective is to reduce the number and severity of restatements of financial statements caused by material accounting errors and irregularities. The Act was designed to achieve this objective by: expanding the enforcement powers of the SEC and DOJ; holding directors and management more accountable for the fairness and accuracy of financial statements; increasing pressure on independent auditors to perform better audits and to focus on detecting frauds; emphasizing the need for more effective internal controls and control structures; and, providing new and much more severe criminal and civil penalties and sanctions to punish violators of U.S. securities laws and SEC regulations. The U.S. Congress also conferred on the SEC new regulatory and rule-making authority, and the Act created the PCAOB to oversee independent auditors and their firms. In addition, Sarbanes-Oxley requires that the SEC conduct at least tri-annual reviews of each SEC registrant’s financial statement filings with the Commission (and more often under certain circumstances). Just prior to the enactment of Sarbanes-Oxley, a Joint Antifraud Task Force of the SEC and DOJ was created by Executive Order of the President of the United States, for the purpose of more effectively investigating and prosecuting corporations and their directors, officers and employees that are suspected of violating U.S. securities laws. The clear intent of Congress and the Executive Branch is for the SEC and DOJ to be more aggressive and vigilant in the area of financial frauds and accounting irregularities – involving U.S. or foreign companies listed on U.S. exchanges. Rechnungswesenpolizeistaat The consequences of being investigated or prosecuted by the SEC and/or DOJ in respect of accounting irregularities, financial fraud, and violations of U.S. securities laws and regulations are almost always disastrous. Investigations can be costly – in terms of time and resources spent, loss of reputation, and economic damage to the company and its stock price. The possibilities of being investigated or prosecuted have increased greatly. The SEC is in the process of nearly doubling its accounting staff and Division of Enforcement personnel (the Rechnungswesenpolizei). The DOJ has shifted substantial resources to the areas of corporate and “white-collar” crime. The newly minted PCAOB (the Wirdschaftprüferpolizei) soon will begin a regular program of review of independent audits and the audit quality of independent auditing firms. Public accounting firms of independent auditors, primarily international firms such as “The Big Four,” have strengthened their audit methodologies in the wake of the demise of Arthur Andersen (in re. Enron) and in response to demands – by Congress, the SEC, and the investing public – for better audits, designed to prevent future “Enrons,” or “WorldComs.” And, SarbanesOxley as much as invites “whistle-blowers” (Anzeige Erstatter) to denounce their current (or former) employers over perceived or suspected financial accounting and reporting issues. Thus, more scrutiny – from every quarter – on U.S. registrants, both domestic and foreign, virtually guarantees that more companies will fall foul of Sarbanes-Oxley, or of


the “Anti-fraud” provisions of the Securities Exchange Act of 1934 (“Exchange Act”) or the Securities Act of 1933, or of any number of other SEC rules and regulations. Only A U.S. Problem? Lest foreign registrants believe that this is only a problem for U.S. (i.e., domestic) corporations who cannot seem to get their numbers right, consider that since passage of the Private Securities Litigation Reform Act of 1995 (“PSLRA”) over 100 foreign companies have been sued in private securities litigation and/or litigation brought by the SEC or DOJ. In the year 2002 a record high 22 foreign registrants on U.S. exchanges were named in securities actions (more than 75 percent of such cases involving allegations of accounting irregularities), and through July 2003 another seven foreign companies have been sued.1 Among foreign registrants European companies are the ones most often involved in such securities litigation. Recent examples in 2003 and 2000-2002 include the following European registrants on U.S. exchanges: Country Accounting Restatement Headqtrd. Issues Raised Involved Company A.C.L.N. Belgium √ √ Aegon NV Netherlands √ Ahold (Royal Ahold NV) Netherlands √ √ Alcatel, SA France √ Allied Irish Banks, Plc Ireland √ √ Alstom, SA France √ Bayer AG Germany Cable & Wireless PlC United Kingdom Core Laboratories NV Netherlands √ √ Daimlerchrysler AG Germany Deutche Telekom AG Germany Elan, Plc Ireland √ √ Energy Holdings, Plc United Kingdom √ Hugo Boss AG Germany √ Intershop Communications Germany √ Imperial Chemicals, Plc United Kingdom KPN Quest NV Netherlands √ Learnout & Hauspie NV Belgium √ √ Marconi, Plc United Kingdom SmartForce, Plc Ireland √ √ Sportsline.com, Inc Finland √ √ Turkcell, AS Turkey Van der Moolen Holding NV Netherlands √ Vivendi Universal, SA France √ Vodafone, Plc. United Kingdom √

Year 2001 2003 2003 2002 2002 2003 2003 2002 2003 2000 2000 2002 2000 2002 2001 2003 2002 2000 2001 2002 2003 2000 2003 2002 2002

Source: PricewaterhouseCoopers 2002 Securities Litigation Study, PricewaterhouseCoopers 2003 Mid-year Securities Litigation Report, and the PricewaterhouseCoopers Securities Litigation Database.


Recent major settlements of private securities litigation against European companies have included: Daimlerchrysler AG ($300 million); Alcatel, SA ($75 million); Deutsche BankBankers Trust ($58 million); Energy Holdings, Plc. ($48 million); and Baan N.V. ($32.5 million). SEC and/or DOJ investigations of some of these European companies or their directors, officers or employees have involved: A.C.L.N., Ahold, Allied Irish Banks, Elan, Learnout & Hauspie, Marconi, and Vivendi Universal. In a recent speech, SEC Commissioner Paul S. Atkins stated: “Much of the attention has focused on failures of U.S. corporations, such as, of course, Enron, WorldCom, Global Grossing, and now HealthSouth. Yet, U.S. investors are not alone in experiencing recent profound failures, some of which were caused by questionable accounting practices, bad management, and poor internal controls. Names like Robert Maxwell, Polly Peck, Royal Ahold, Swiss Air, Phillip Holzmann, and Vivendi come to mind. Therefore, restoring investor confidence by strengthening corporate governance is of great importance to the world's financial markets. It is not an issue unique to the U.S. or the EU”2 These remarks of SEC Commissioner Atkins are not the only ones by SEC representatives to focus attention on European companies in connection with enforcement of Sarbanes-Oxley. In his remarks to the Conference of the Institute of Chartered Accountants of England and Wales, former SEC Chairman Harvey Pitt gave this view of the future of enforcement of Sarbanes-Oxley for European companies: “Sarbanes-Oxley generally makes no distinction between U.S. and foreign private issuers listed in the United States. It applies equally to all who seek to access U.S. capital markets. We are committed to implement the Act in a manner fully consistent with its purpose and intent. …Our mandate is to implement the Sarbanes-Oxley Act fully for all companies, foreign and domestic. Foreign companies therefore can expect that many of our new rules will apply to them.”3 This new legal and regulatory environment of Sarbanes-Oxley is here to stay for European registrants on U.S. exchanges. Beyond the U.S. capital markets, the spill-over effect of Sarbanes-Oxley already is occurring in the forms of: newly adopted, or proposed, public companies listing standards, bills, and regulatory acts in various European countries; increased activities by European regulators such as the French Commission des Operations de Bourse (“COB”), the U.K. Financial Services Authority (“FSA”) and Financial Reporting Review Panel (“FRRP”), the German Securities
Speech to the International Financial Law Review (March 25, 2003) by SEC Commissioner , The Honorable Paul S. Atkins, The Sarbanes-Oxley Act of 2002: Goals, Contents, and Status of Implementation.
3 2

Speech to the Institute of Chartered Accountants of England and Wales (October 10, 2002) by former SEC Chairman, The Honorable Harvey L. Pitt, A Single Capital Market in Europe: Challenges for Gloabal Companies.


Commission (“BAWe”), and the Italian Securities Commission (“CONSOB”). There is a new zeitgeist of “financial transparency” that is sweeping the global capital markets. A sea change has happened. The paradigms of financial reporting, corporate governance, internal controlling and regulatory compliance have shifted. Welcome to the new world.

European Risk Environment
European companies accessing the U.S. capital markets that fail to recognize, or react to, these changes in securities laws, regulation, and corporate governance requirements proceed at great risk. Those companies that change with the times have much to consider, and much to do, to achieve and maintain compliance with such securities laws and regulations – particularly in respect of Sarbanes-Oxley. To manage the new or increased risks in the areas financial accounting and reporting, auditing, governance and compliance risks requires: knowledge and understanding of the situation, appreciation of the paradigm shifts and what they mean, development of a prudent strategy for legal and regulatory compliance, and design and operation of adequate and effective control structures and financial accounting and reporting controls. Some risks are inherent in particular elements of Sarbanes-Oxley and affect all companies – foreign and domestic – that are U.S. registrants. Other risks are unique to, or greater for, European companies and their directors and officers; some of these kinds of risks are discussed below. Governance Structures In the U.S. the dichotomy of supervisory boards and executive boards generally does not exist. But, Sarbanes-Oxley was written by U.S. legislator who understand (at best) only the U.S. corporate board model. U.S. boards of directors, more so than European supervisory boards, involve themselves in corporate strategy, executive decision-making, and managerial aspects of financial accounting and reporting to a much greater degree. Audit committees of boards of directors have existed and operated for longer in U.S. publicly listed companies then in many European companies; and, the role of the typical U.S. corporate audit committee (that is, its charter, relationships vis-à-vis independent auditors and management, audit committee duties and responsibilities, and audit committee programs and work agendas) has been well-developed and institutionalized within the corporate governance culture in the U.S. Sarbanes-Oxley was modeled on “best practices” for U.S. audit committees – developed by the U.S. exchanges (e.g., NYSE), the SEC, the American Institute of Internal Auditors, and U.S. lawyers and public accountants. Little thought was given in the legislative history of Sarbanes-Oxley to issues and environmental differences unique to foreign registrants, particularly European companies. Changing “GAAP” Generally accepted accounting principles (“GAAP”) in the U.S. is substantially different than GAAP in use in many European countries. For that matter U.K. GAAP is substantially different from Dutch GAAP or German GAAP; Dutch GAAP or Swedish GAAP is substantially different than French GAAP; Italian GAAP is substantially


different from German GAAP or Polish GAAP; and Irish GAAP is substantially different from Belgian GAAP.4 But, one may rejoin, International Financial Reporting Standards (“IFRS”) of the International Accounting Standards Board (“IASB”) are at hand and convergence to IFRS is near (by the year 2005); and, the U.S. Financial Accounting Standards Board (“FASB”) and the IASB have agreed a plan of convergence of U.S. and international GAAP.5 D’accord. C’est une bonne idée! What could be more perfect … or more global?

It is an open question whether Northern Ireland GAAP ever will converge with Republic of Ireland GAAP, or whether Flemish Belgian GAAP ever will accord with Waloon Belgian GAAP; however, the Swiss are at peace with everyone’s GAAP in the Eurozone. But, not so fast. Just because the IASB promulgates IFRS does not mean that either all European countries will adopt such GAAP (there is an EU opt-out provision), or that any such IFRS GAAP will conform to U.S. GAAP – as understood by the various European countries, or as applied by the U.S. or the U.K. and the Eurozone. Just contemplate the “FAQ” section of the Deutsches Rechnungslegungs Standards Committee e.V. (German Accounting Standards Committee, or “GASC”), regarding IFRS: “Does GASC answer questions about IAS/IFRS? Sorry, no. Does GASC answer questions about US-GAAP/SEC? Sorry, no. Will accounting standards ever be complete? Accounting standards need to keep abreast of changes in the law, business practice and users’ expectations. Since these are constantly evolving, accounting standards probably will never be completed.” Or, consider the following news items reported in the latest edition of Accounting Age (London, October 30, 2003): “IAS Training Crisis Looms Half of UK accountants have still not received training in international accounting standards, as complacency threatens to undermine UK conversion to IAS. … EU States Demand Standards Delay A third of EU member states have joined forces to demand an extension to the European Commission's 2005 deadline for companies to comply with international financial reporting standards. … IASB Upsets European Bankers A dispute over a new international accounting standard on derivatives could destabilise the role of the International Accounting Standards Board. … EC Pushes for More Talks Between Banks and IASB Talks should continue between European banks and the International Accounting Standards Board following the release of revised drafts on financial instruments, according to the European Commission.”



First, consider that the SEC still believes in “GAAP Americanus.”6 Now, consider that the FASB-IASB concordat is just an ambition (and not a contract). Finally, consider that “convergence” very well may mean adoption of U.S. style, rules-based GAAP in many areas (such as revenue recognition, accounting for reserves and allowances, impairment of goodwill and long-lived assets, accounting for derivatives and financial assets, fair value accounting, etc.). Zut alors! Mein Gott! More likely than not, the U.S. won’t abandon its approach to GAAP that combines both principles-based and rules-based standard-setting. As Sir David Tweedie, Chairman of the IASB, stated to the U.K. Parliament: “Many of the international standards that the IASB inherited from our predecessor body are similar to their U.S. equivalents. Both international and U.S. standards strive to be principles-based, in that they both look to a body of accounting concepts. U.S. standards tend, on the whole, to be more specific in their requirements and include much more detailed implementation guidance. In my view, the U.S. approach is a product of the environment in which U.S. standards have been set. Simply put, U.S. accounting standards are detailed and specific because the FASB’s constituents have asked for more detailed and specific standards.”7 Equally likely is the strong probability that IFRS – notwithstanding the IASB’s professed preference for “principles-based” standard-setting – will become much more rules-based: (a) due to the accounting complexity of many of the issues on the IASB’s present agenda; (b) because principles-based standard-setting alone just won’t be acceptable to the SEC ; and (c) so as to achieve convergence with the FASB and the vast body of existing U.S. GAAP set forth in FASB Statements of Financial Accounting Standards (“SFAS”), FASB Emerging Issues Task Force authoritative pronouncements, and FASB Financial Interpretations (“FIN”).This consequence of convergence already is manifest and playing out in connection with the proposed IAS 39 standards on derivatives and financial instruments8
Based on data from the New York Stock Exchange (“NYSE”) for the year 2002, the total value of securities traded on global capital markets is approximately $20 trillion, of which approximately $16 trillion is listed and traded on U.S. exchanges; the other $4 trillion is dispersed among the London Stock Exchange (“LSE”), various European exchanges, the Tokyo exchange and a number of other non-U.S. exchanges. What are the odds that the SEC (or the U.S. Congress) will relinquish primary GAAP authority over three quarters of the world’s equity capital to any international standard-setting body? What are the odds that the SEC will co-opt the new IFRS-U.S. GAAP “convergence” and subject it to SEC interpretation and SEC standard-setting? The United Kingdom Parliament, Select Committee on Treasury (September 2, 2002), Memorandum of Sir David Tweedie, Chairman, International Accounting Standards Board. See Financial Times (March 10, 2003), Companies & Financial International: Brussels Sticks to Its Guns, reporting Sir David Tweedie’s comments concerning a campaign by French banks and various other European financial entities to block the implementation of International Accounting Standard (“IAS”) 39, Financial Instruments: Recognition and Measurement:
8 7 6


Ultimately, IASB will out in the European arena of financial accounting and reporting standard-setting, and convergence – more or less – will be achieved between U.S. GAAP and IASB GAAP.9 However, when convergence is achieved, it will produce a set of accounting standards that are far more rigorous, and much more rules-based, than now exists for many European companies. As Sir Davis Tweedie assured the U.S. Congress: “We [the IASB] have no intention to ‘water down’ existing standards in any jurisdiction. Instead, we plan to build a set of financial reporting standards that are the ‘gold standard’ …”10 In the meantime – as EU adoption of IFRS approaches in the year 2005, and indigestion over IAS 39 (or any other standards to be promulgated under the IASB’s agenda) subsides, and European accountants train-up on new IFRS standards, and EU countries decide to opt-in or opt-out (selectively, on a case-by-case, country-by-country basis)11 – the risks associated with changing GAAP to IFRS and convergence of IASB GAAP with U.S. GAAP are great. These risks include: misapplication; misinterpretation; confusion; and, the possibility that adoption of IASB standards will expose prior accounting standards used, and accounting treatments applied, to scrutiny by the SEC in respect of whether they ever were reconcilable to U.S. GAAP (or were, in fact, properly reconciled in the annual reports on Form 20-F filed by foreign registrants with the SEC). And then, there also is the reality that IASB standards – more akin to U.S. GAAP – will cause financial accounting and reporting problems for some European companies. This may be
“Sir David Tweedie, IASB Chairman, signaled he would only consider limited, technical changes [to the exposure draft for IAS 39]. He defended the central thrust of IAS 39, including the measurement of derivatives and certain other financial instruments at fair or market values. … Sir David said the IASB could not capitulate to pressure from companies and politicians. ‘If we do that the whole ethos of our institution is gone,’ he said. ‘You have lost all respect. The Americans would almost throw up.’ … He warned that the Securities and Exchange Commission, the chief U.S. financial regulator, would continue to insist on EU companies producing a separate set of accounts under U.S. accounting rules if they did not use the international standard [i.e., IAS 39] on financial instruments. … However, he accepted IAS 39 was not a perfect accounting standard because it is heavily based on U.S. financial reporting rules, rather than principles [emphasis added]. So much for “principles-based” purity in IASB GAAP. The FASB and IASB agreed to use their “best efforts to (a) make their existing financial reporting standards compatible as soon as is practicable and (b) to coordinate their future work programs to ensure that once achieved, compatibility is maintained” in the “Norwalk Agreement” Memorandum of Understanding of the FASB and IASB (September 18, 2002). Sarbanes-Oxley, Section 108, “Accounting Standards” encourages the same.
10 9

Senate of the U.S. Congress, Committee on Banking, Housing and Urban Affairs (February 14, 2002), Statement of Sir David Tweedie, Chairman, International Accounting Standards Board.

See Le Monde (August 6, 2002), Accounting Standards at the Heart of Corporate Scandals, Frédéric Lemaître: “Europe keeps a key card: to become enforceable for European listed businesses, IASB's accounting rules must be ratified by the EU. They can be rejected if deemed incompatible with ‘the European public interest’. … ”



especially true for European financial institutions required to begin fair-valuing certain assets under the proposed IAS 39; and, such problems also may arise in the areas of: revenue recognition; impairments of goodwill and long-lived assets; accounting for leases; accounting for, and reporting of, “off-balance sheet” transactions and arrangements; and, accounting for business combinations. Finally there is the risk that the SEC will interpret IASB GAAP by its own regulatory standards and in its own fashion. Why not? For years the SEC staff have been doing the same in respect of U.S. GAAP. Recent examples of this “GAAP-activism” by the SEC staff include: SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality; SAB No. 100, Restructuring and Impairment Charges; SAB No. 101, Revenue Recognition in Financial Statements; and SAB No. 102, Selected Loan Loss Methodology and Documentation Issues. Under the Exchange Act the U.S. Congress conferred on the SEC the authority to establish and enforce GAAP for companies listed on U.S. exchanges; this authority was reconfirmed in Sarbanes-Oxley.12 In practice the SEC generally defers to the private standard-setting bodies, such as the FASB and the American Institute of Certified Public Accountants, in matters of promulgating U.S. GAAP. However, in respect of enforcement actions by the SEC, GAAP is what the SEC says GAAP is. European companies can expect the same when the SEC staff begins to dissect IASB GAAP. U.S. and IASB “GAAP Gap” And beside all this, between us and you there is a great gulf fixed.13 Until (if ever) U.S. GAAP and IASB GAAP truly do converge, European companies registered on U.S. exchanges must provide, in their financial statements filed with the SEC on Form 20-F, a reconciliation between any non-U.S. basis of GAAP used (e.g., Dutch GAAP, U.K. GAAP, French GAAP, etc.) and the accounting for, and reporting of, results of operations that would occur under U.S. GAAP. Even when the EU implements IFRS in 2005 there likely will remain significant differences between U.S. GAAP and IASB GAAP – at least for a while, and possibly still forever. These differences can be significant.14 If the only risk involved in dealing with the “GAAP gap” through
12 13

See Sarbanes-Oxley, Section 108, “Accounting Standards.” N.T. Luke 16: 19-31.

See Remarks to the American Council on Germany by former SEC Chairman, The Honorable Arthur Levitt (October 7, 1999), Corporate Governance in a Global Arena: “If anyone doubts the disparate effects that different accounting practices can have, consider again the case of Daimler-Benz. Under German accounting standards, Daimler reported a profit of 168 million Deutschmarks in 1993. Under U.S. GAAP standards, the company reported a loss of almost a billion Deutschmarks for the exact same period. You can just imagine an investor’s confusion and concern.” For a more current example, consider Note 38, “Reconciliation to U.S. GAAP” of the Consolidated Financial Statements of Alcatel, SA for the Year Ended December 31, 2002 as filed with the SEC on Form 20-F, which reflects the following (Euros in millions): Net (loss) as reported in the Consolidated Income Statement – (4,575); Net (loss) according to U.S. GAAP – (11, 511). For Alcatel, SA between U.S. and French GAAP results of operations for the year 2002 there truly was “a great gulf fixed” … a gulf of Euro 6.9 billion in additional net loss.



reconciliation in the Form 20-F, this would be problem enough. But, this is only the tip of the iceberg. For many foreign companies that file financial statements with the SEC on Form 20-F the process of reconciling between their basis of GAAP and U.S. GAAP is performed at a “top-side,” consolidated level. This increases the risks that differences will go unnoticed (hence unreconciled and unreported) between applicable GAAP that occur at the level of subsidiaries, divisions, branches, affiliates (accounted for on the equity method), and partially consolidated ventures. Exacerbating this risk is the distinct possibility that local (i.e., subsidiaries, divisions, branches, etc.) controllers and chief accounting officers may lack the requisite U.S. GAAP knowledge to even know what, if any, GAAP differences might have been missed. Accounting Cultural Differences Rather than generalize about accounting practices more commonly found in Europe and among some European companies, simply take heed of the following U.S. accounting cultural phenomena (particularly in respect of the SEC), and appreciate the possibilities that there may be accounting and business cultural differences that may be very important. The SEC staff abhors “excess reserves” or provisions, any kind of unspecified or “general” reserves or allowances, and anything that smacks of “earnings management” achieved by the manipulation of reserves or provisions. In many European countries, their respective current GAAP (i.e., before implementation of IFRS) provides little specific guidance on revenue recognition, and more emphasis may be placed on the legal form (vice substance) of a revenue contract or arrangement in deciding when to recognize revenue. In the U.S., rule-based GAAP consists of specific (one might say minutely detailed) guidance on revenue recognition – for all kinds of commercial circumstances, in many different industries (e.g., software, construction, entertainment, health care, agriculture, oil & gas exploration and production, transportation, etc.), and under various types of contracting conditions (e.g., arrangements involving “up-front” fees, multiple-element arrangements, revenue recognition when right of return exist, “bill-and-hold” arrangements, etc.). And, on top of a plethora of revenue recognition, rulesbased U.S. GAAP, there is SEC SAB No. 101, Revenue Recognition in Financial Statements. SEC SAB No. 100, Restructuring and Impairment Charges, stands for the proposition that no amount of documentation and support for restructuring charges and reserves is ever enough (at least, it often seems, in the eyes of the SEC Division of Enforcement staff). Le chien a mangé ma documentation is not generally recognized as an excuse, by the SEC staff, for failing to have


competent and persuasive support for accounting measurements, estimates and projections of restructuring charges and reserves. Under U.S. GAAP and SEC practice material accounting errors are just plain “errors;” the are no “fundamental errors” (such as are distinguished in Dutch GAAP, or are treated in IFRS). Under U.S. GAAP errors are corrected by prior period adjustments (and restatement of the affected previously issued financial statements); errors affecting prior financial statements are not corrected in the current period financial statements (as such are treated under French GAAP, Dutch GAAP, etc., or are permitted to be treated under IFRS).15 Virtually all of the so-called “accounting melt-downs” involved in the major U.S. corporate accounting scandals such as Enron, WorldCom, Adelphia, Health South, et al. resulted in: (a) identification of accounting errors (which included accounting irregularities); (b) restatement of previously issued financial statements, by prior period adjustments; (c) almost immediate reaction of the capital markets in the form of substantial “stock price drops;” and (d) ensuing investigations by the SEC and/or DOJ (and in the cases of Enron and WorldCom, by the U.S. Congress). In point of fact, the SEC Division of Enforcement automatically reviews all instances of restatements of prior period financial statements. The SEC (and now the DOJ, and the U.S. Congress) are “on the warpath” against restatements of financial statements and resulting amendments of SEC filings (e.g., Form 20-F, Form 6-K). Separate studies of the issue of restatements – and their impact on shareholders’ stock investment values – were performed by the SEC (as mandated by Sarbanes-Oxley) and the U.S. General Accounting Office (“GAO”), an investigative arm of Congress (at the request of the U.S. Senate Committee on Banking, Housing and Urban Affairs). Both studies concluded that restatements, due to material accounting errors and irregularities, have been on the rise. This issue, enflamed by the “accounting melt-downs” at Enron, WorldCom, et al., was the driving force behind Sarbanes-Oxley. In the U.S., restatements due to material accounting errors and irregularities are brutal. The SEC Division of Enforcement staff, with legions of lawyers and vast arrays of accountants, really (that means REALLY!) investigate suspected financial accounting and reporting irregularities and potential violations of securities laws and SEC regulations. They are tenacious, resourceful, and indefatigable. Once they open an investigation into a company’s accounting issues, SEC investigators can put Inspector Javert to shame in making companies and their directors, officers and employees feel like Les Misérables. The SEC Division of Enforcement are “results oriented;” and, unfortunately, “results” are measured in


See FASB SFAS No. 16, Prior Period Adjustments, and Accounting Principles Board Opinion (“APB”) No. 20, Accounting Changes.


cases brought, “cease and desist orders” obtained, directors and officers bars and sanctions meted out, fines levied, and criminal referrals (to the DOJ) made.16 Criminalizing Corporate Governance, Accounting and Reporting Infractions European companies and their directors, officers and employees may not be able to appreciate just how far the pendulum has swung in the direction of criminal prosecution, by U.S. law enforcement agencies, of business misconduct. Parallel investigations and criminal prosecutions by U.S. federal and state law enforcement authorities – on top of investigations and civil prosecutions by the SEC – now are common.17 Criminal convictions and very long prison sentences for securities fraud are becoming more common. A central part of Sarbanes-Oxley is the new and increased (some would say draconian) criminal penalties and sanctions, where just a single count (i.e., charge) can result in a mandatory sentence for: destruction, alteration or falsification of corporate documents or record – 20 years; destruction or alteration of audit records or work papers – 10 years; securities fraud – 25 years; mail fraud or wire fraud – 20 years; and intentional mis-certification (under Section 302 of Sarbanes-Oxley) of financial statements – 20 years. Next, Amnesty International may be taking on the plight of “business tycoons” as a class of political prisoners rotting away in U.S. jails. Consider just the following examples. Dennis Kozlowski, former Chairman and CEO of Tyco International may go to jail over a “toga party” on the island of Sardinia (not to mention accusations that he looted $600 million from Tyco). U.S. home and garden life-style maven Martha Stewart was indicted and faces trial over allegations of obstruction of justice in the Inclone Systems stock insider-trading case; and, former Imclone Chairman and CEO Sam Waksal already has pled guilty to insider-trading charges and is serving a seven year prison sentence. Former “star” investment banker and head of Credit Suisse First Boston’s Global Technology Group, Frank Quattrone, just dodged a bullet on a deadlocked jury in his criminal trial, but he is likely to be re-tried on federal criminal charges of obstruction of justice in connection with an SEC investigation of Credit Suisse First Boston. Former Enron CFO Andrew Fastow has been indicted and charged with enough counts (109 in total) of securities fraud, mail fraud, and wire fraud to be imprisoned for life if convicted; the government even has indicted Fastow’s wife, Lea, on six counts of


As one former Assistant Director of the SEC Division of Enforcement (to remain anonymous) once quipped: “No one ever got promoted at the SEC by conducting investigations and then concluding that nothing was wrong.”

Extraterritoriality concerns – expressed by certain countries, the EU and various European companies and commercial associations – over Sarbanes-Oxley takes on a whole new meaning when contemplating: a criminal trial in a U.S. state court in Oklahoma, Idaho, Wyoming or Alaska (in the Winter); then, a federal criminal trial in, say, Chicago, Illinois; and then, an SEC civil proceeding in Washington, D.C.; and then, a consolidate private securities class action in Jackson, Mississippi.



conspiracy to commit mail fraud, money laundering and tax evasion.18 Former Enron Treasurer, Ben Glisan, already has pled guilty to securities fraud (for participation in the falsification of Enron’s financial statements) and been sentenced to five years in prison. Former WorldCom CEO, Bernie Ebbers, CFO Scott Sullivan, and four other former executives await trail in Oklahoma state court on 15 counts of felony fraud in connection with the $11 billion financial fraud at WorldCom; if convicted on all counts, Ebbers, Sullivan and the other defendants each could be sentenced to 150 years in state prison. Meanwhile, Sullivan also awaits trial on similar federal government charges of criminal and securities fraud.19 Already having pled guilty to various criminal fraud charges are former WorldCom executives: David Meyers, SVP and Controller; Buford Yates, Director of General Accounting; Troy Normand, Director of Legal Entity Accounting; and, Betty Vinson, Director of Management Reporting – they face prison sentences ranging from 10 to 25 years. One can see a pattern here. The above list of criminal indictments, guilty pleas and convictions is just a small sampling; similar fates have befallen former directors, officers, executives and employees at, among others: Rite-Aid; McKesson HBOC; Adelphia; and Cendant.At present, the DOJ continues to investigate former senior executives at: Enron; WorldCom; Health South; and Xerox; and, the DOJ is conducting investigations in other matters such as Computer Associates; Network Associates; and Sunbeam. But, these are U.S. companies and U.S. citizens, so where is the risk to European companies or their directors, officers or employees. First, consider that the “revolution” against business misconduct just has gotten started in the U.S. – more heads will come off. If European companies become targets of U.S. criminal investigations, their fates could be the same as those of Enron, WroldCom, Adelphia, Adelphia, et al. and their former directors, officers and employees. Next consider the plain language of SarbanesOxley – it applies equally to U.S. domestic and foreign registrants on U.S. exchanges – all of Sarbanes-Oxley applies to such foreign registrants, including the criminal penalties set forth in Titles VIII and IX of the bill. Then consider where “extraterritoriality” begins and domestic U.S. prosecution ends. In connection with the Enron matter, the former “Big Five” international accounting firm of Arthur Andersen and its former partner David Duncan (the engagement partner for the Enron audits) were convicted of obstruction of justice – the Arthur Andersen firm dissolved and Duncan was sentenced to prison. Arthur Anderson was a global firm, with major partnerships and operations in the U.K., France, Germany, Italy and throughout the EU. After being criminally convicted in the U.S. Arthur Andersen’s U.S firm did not just collapse and go out of business, Arthrur Andersen went out of business in the U.K., France, Germany, Italy, throughout the EU, throughout the world. Branded a criminal enterprise, barred from doing business in the
18 19

There is no word yet on whether U.S. federal prosecutors plan to indict the Fastow’s family pets.

The seven count federal indictment of Sullivan charges conspiracy to commit securities fraud and filing fraudulent statements with the SEC; if convicted at trial in federal court, Sullivan possibly could be sentenced to 70 or more years in federal prison, in addition to a maximum 150 years in state prison. Since the 42 year-old Sullivan is unlikely to live to be 262 years old, conviction on all state and federal criminal charges could amount to a life sentence.


U.S., stripped of U.S. state licenses to practice, cut off from over 60 percent of its global market (i.e., its U.S. market), and excluded by law from doing business with any U.S. government entities or agencies and many similar U.S. state governments – Arthur Andersen simply could not continue to exist, anywhere. Risks to European companies are complacency and the mistaken belief that U.S. criminal statutes simply cannot, or will not, apply to them. The price for being wrong about this belief could be catastrophic.

Extraterritoriality and the “Long Arm” of Sarbanes-Oxley
Section 106 of Sarbanes-Oxley, “Foreign Public Accounting Firms” specifically extends the regulatory authorities of the PCAOB and the SEC to foreign public accounting firms and foreign partnerships or affiliates of U.S. public accounting firms. In order to practice auditing companies – U.S. or foreign that are registered on U.S. exchanges – foreign public accounting firms must consent: to produce their working papers to the PCAOB and/or SEC, accept the jurisdiction of U.S. courts in respect of subpoenas for such records and documents, and abide the jurisdiction of the PCAOB and/or SEC in disciplinary matters. Section 301 of Sarbanes-Oxley, “Public Company Audit Committees” mandates that the SEC and U.S. exchanges de-list any company (U.S. domestic or foreign) that fails to comply with the audit committee requirements and standards set forth in Titles II and III of Sarbanes-Oxley and as set forth by the SEC and the various U.S. exchanges. Sections 304, “Forfeiture of Certain Bonuses and Profits” and 305, “Officers and Directors Bars and Penalties” apply equally to directors and officers of U.S. and foreign registrants. The SEC can force disgorgement of certain bonuses or other payments received by persons, and bar a foreign company’s directors or officers from serving in such capacities for foreign registrants. Non-compliance with any such orders by the SEC could result in delisting of the company from U.S. exchanges, as well as civil penalties and sanctions against the companies and the directors and/or officers. Section 602 of Sarbanes-Oxley, “Appearance and Practice Before the Commission,” allows the SEC to “deny, temporarily or permanently, the privilege of practice before the Commission, in any way.” This includes serving as an accountant or financial officer or employee in any company, U.S. domestic or foreign, registered with the SEC. The “Corporate Responsibility” Sections of Title III of Sarbanes-Oxley (e.g., Section 302 Cerification) and “Enhanced Financial Disclosures” Sections of Title IV (e.g., Section 404 Reporting on Internal Controls) apply equally to U.S. domestic and foreign registrants on U.S. exchanges. Section 302 specifically states the authority of the SEC extends to companies whether incorporated in the U.S. or foreign domiciled. Titles VIII and IX of Sarbanes-Oxley, respectively “Corporate and Criminal Fraud Accountability” and “White Collar Crime Penalty Enhancements,” as well as Title XI, “Corporate Fraud and Accountability” apply their penalties and sanctions – criminal and civil – to all registrants on U.S. exchanges, and their directors and officers and employees, whether U.S. domestic or foreign.


Mutual Legal Assistance in Criminal Matters Treaties Mutual Legal Assistance in Criminal Matters Treaties (“MLATs”) are in force between the U.S. and various foreign governments development. Under such MLATs, each country designates a central authority, generally the U.S. DOJ and the justice departments or ministry in the foreign country, for direct communication. These MLATs provide: reciprocal powers to: summon witnesses, to compel the production of documents and other real evidence, to issue search warrants, and to serve process. For Europe, there currently are in force seven such MLATs as follows:20 U.S. - U.K. MLAT, signed 1/6/94; entered into force 12/2/96; 104th Cong., 1st Sess., Treaty Doc. 104-2, Exec. Rpt. 104-23; U.S. - Netherlands Treaty on Mutual Assistance in Criminal Matters, entered into force September 15, 1983, TIAS 10734; U.S. - Italy Mutual Assistance Treaty, signed 11/9/82; entered into force November 13, 1985, 98th Cong., 2d Sess., Sen. Ex. 98-25, Exec. Rpt. 98-36; 24 ILM 1539; U.S. - Spain Treaty on Mutual Legal Assistance in Criminal Matters, entered into force June 30, 1993. Senate Treaty Doc. 102-21, 102nd Cong. 2d. Ratified October 9, 1992; U.S. - Switzerland Treaty on Mutual Assistance in Criminal Matters, entered into force January 23, 1977, 27 UST 2019, TIAS 8302; U.S. - Hungary MLAT, signed December 1, 1994. entered into force 3/18/97; 104th Cong., 1st Sess., Treaty Doc. 104-26; Exec. Rpt. 104-26. U.S. - Turkey Treaty on Extradition and Mutual Assistance in Criminal Matters, entered into force January 1, 1981, 32 UST 3111; TIAS 9891. Pending are MLATs negotiated and awaiting ratification in respect of: Austria; Belgium; Luxembourg; Poland; and, Sweden. SEC International Agreements and Arrangements The SEC has entered into various agreements and arrangements with foreign governments and their justice agencies, departments or ministries, and securities regulators to undertake investigations of non-U.S. companies and non-U.S citizens of such countries. These agreements and arrangements include Memoranda of Understanding (“MOU”), frameworks for cooperation, undertakings through “letters


Source: U.S. Department of State.


rogatory.”21 European countries covered by such agreements or arrangements with the SEC include: France, Germany, Hungary, Italy, Luxembourg, Netherlands, Norway, Spain, Switzerland, Sweden, and the United Kingdom. The SEC also has negotiated a Joint Statement of Cooperation with the European Union.22 Practical Realities, et Réalités Practiques, und Praktische Wirklichkeiten According to the SEC, essentially all public accounting firms – both U.S. domestic and foreign – auditing registrants on U.S. exchanges have registered with the PCAOB. Such registration entails the undertakings by the firms and their U.S. partnerships or affiliates set forth in Section 106 of Sarbanes-Oxley. The possibility that a foreign public accounting firm might still resist production of its working papers and records remains; however, in the matter of Learnout & Hauspie23 the SEC confronted a similar problem and solved it by proceeding directly against both KPMG’s Belgian firm and its U.S. firm – the subpoenaed working papers were produced. The SEC has fought and won similar battles in the cases of Montedison, SpA, Baker-Hughs, Inc – Indonesia, and Maxwell Communications Corporation. The reality is that, for most auditors of international companies (including most European companies registered on U.S. exchanges), the public accounting firms have substantial partnerships and practices in the U.S.; the price of non-resolution of SEC (and now PCAOB) demands for foreign firms working papers and records is SEC enforcement actions against these U.S. partnerships and affiliates, enforcement of SEC subpoenas through the use of letters rogatory, and grinding court battles – both in the U.S. and in foreign jurisdictions. In the matter of Royal Ahold N.V., Ahold has voluntarily cooperated with the SEC and DOJ to produce documents and records, facilitate the taking of testimony of Company officers and employees, and otherwise comply with requests for information from the SEC and DOJ. Similar cooperation arrangements regularly are entered into by companies with the SEC (and DOJ) in connection with investigations, because the consequences of non-cooperation can be severe. So, who cooperates? Elan, Plc., Sony, Vivendi, Credit Suisse, UBS, A.C.L.N., SmartForce, Plc, E.ON Ag – these are but a few of those companies. Given U.S. Federal sentencing guidelines in criminal matters, and the SEC’s stated policies on cooperation, the practical realities are that companies and their directors, officers and employees may have little choice but to cooperate.

Letters rogatory are the customary method of obtaining assistance from abroad in the absence of a treaty or executive agreement. A letter rogatory is a request from a judge in the United States to the judiciary of a foreign country requesting the performance of an act which, if done without the sanction of the foreign court, would constitute a violation of that country's sovereignty. Letters rogatory are customarily transmitted via the diplomatic channel, or by transmitting a copy of the request through Interpol, or through pre-negotiated arrangements with the foreign country.


See Mann, Mari & Lavdas, International Agreements and Understands for the Production of Information and Other Mutual Assistance, The Int''l Law, Vol. 29, No. 4, 780, 838 (1995). See also U.S. Department of State, Office of the Legal Advisor, Treaty Affairs, “List of Treaties and Other International Agreements of the United States In Force (January 1, 2003). See Learnout & Hauspie Speech Products, NV (L.S.R. 17782, October 10, 2002).



Un Point de Vue Différent, und Ein Anderer Geseichtpunkt, and a Different Point Of View Mais naturellement, there always will be a different point of view. Just imagine if the EU and the European Commission (“EC”) made rules and enforced regulations that affected U.S. corporations doing business in Europe. Incroyable! Just consider what would happen if the EC were to block a merger between two U.S. corporations, under European anti-monopoly rules. Unverschämt! What would the Americans think if the EU were to erect a barrier to trade like the one that Sarbanes-Oxley erects regarding EU public accounting firms?24 Infamia! What would the SEC and DOJ do if European countries enforced their own laws and regulations on U.S. companies that registered securities on EU exchanges and bourses? Steady on, old chap! Without starting a trade war perhaps a “thaw” in relations over Sarbanes-Oxley still is possible. There is no doubt that Sarbanes-Oxley was enacted in time of crisis (caused by Enron, WorldCom, et al) that was almost entirely U.S. in fact, and that was – generally – not the making of the EU or of European companies. The legislation was born out of politics in the U.S., a crisis of confidence among investors caused by the corporate accounting and reporting scandals in the U.S., and pent-up frustrations over a number of accounting and financial reporting excesses, and a number of auditing failures, that had occurred during the 1990s and in 2000 through 2002. However, the basic propositions of Sarbanes-Oxley – and the objectives of good governance, better transparency in financial reporting, deterrence of material accounting errors and irregularities in financial statements, less restatements, more auditor independence, better audits – these are good things that everyone (in the U.S. and Europe) can embrace and should espouse. The force at work here is not the U.S. (imposing its idée on the EU and European companies); rather, the force is the idée, whose time is come … whose time is now. Perhaps SarbanesOxley deserves a second look. The SEC and PCAOB have stated that they will defer to enforcement regimes that are established and effective in other countries. Sarbanes-Oxley expressly provides the SEC with the authority to modify the elements of Sarnabes-Oxley in respect of other countries and their particular securities laws and regulatory enforcement practices. The SEC has signaled, in many ways, their keen interest in working with (and not at cross-purposes to) other countries’ regulators to achieve a common good and to implement Sarbanes-Oxley in a way that recognizes – and accommodates – valid differences in securities laws and regulatory structures. There is at hand an opportunity to advance the cause of global investors, international markets, and better U.S.-EU relations (in the areas of financial affairs, capital markets and regulatory proceedings). This opportunity should not be missed.

See Fédération des Experts Compatables Européens, Key European Developments: Implications of Sarbanes-Oxley (September 2002): “This [Sarbanes-Oxley] will de facto create an absolute prohibition for European public accounting firms to operate in the U.S. market and therefore should be considered and addressed by the EU in terms of competition and barriers to trade.”



Crime and Punishment
C’est pire qu’un crime, c’est une faute25 Here is how it might happen. A “whistle-blower” (perhaps a recently dismissed employee), will call one of the many SEC or DOJ “hot-lines,” or send an E-mail to the company’s general counsel, or write to the company’s independent auditors. Or the auditors, in the ordinary course of their testing, will come across something that does not seem correct or proper. An investigation is called for by the audit committee of the supervisory board of directors; special counsel and forensic accountants are called in. The investigation unearths more, and then even more, suspicious findings regarding the accounts – improper revenue recognition, “side-letters” that conceal the true substance of arrangements, overcapitalization of expenditures that should have been expensed, misapplication of GAAP … . Until, suspicions become serious concerns, then concerns become problems, and those problems multiply into accounting errors that are deemed to be irregularities. Eventually the SEC staff must be told; and too, the company’s independent auditors are told – they take it badly. A formal SEC investigation ensues. The company announces to the markets the existence of the investigation and its preliminary findings. The markets take this news badly; and, the company’s stock drops by over 43 percent in just one day of trading. Within several days, multiple U.S. private securities class actions are filed against the company. And then, the company general counsel’s telephone rings … it is the U.S. Department of Justice. An official DOJ investigation begins; a U.S. Federal Grand Jury is empanelled. The press and other financial news media, smelling blood in the water, begin to circle the company, its directors and officers. Stories begin to “leak” from “unidentified” sources. The company’s bankers begin to worry – they are taking all of this badly. The investigations – internal corporate, SEC and DOJ – grind on, finding more because of officers and managers and employees who begin to talk, and discoveries of incriminating E-mail, and productions of documents to the SEC and DOJ in response to subpoenas. Now completely panicked and totally mistrustful of any management representations, the independent auditors withdraw their previously issued opinions on the company’s financial statements. The company’s stock price continues its free-fall, losing another 30 percent of its value. The internal corporate investigation by the special counsel and forensic accountants is completed and the audit committee receives the bad news – hundreds of millions of Euros in revenues and earnings have been misstated. Under U.S. GAAP and SEC rules, the company now must make prior period adjustments and restate its previously issued financial statements and file a corrected and amended Form 20-F with the SEC. The SEC does not consider the case closed; rather, it continues to investigate, and it believes that even more adjustments and restatements are needed. The SEC and DOJ begin to take

Antoine Boulay de la Meurthe (1804)


depositions of the company’s independent auditors – who react very badly. The private securities litigation plaintiffs amend their lawsuits to include the auditors. Press articles begin to ask, “Where were the auditors.” Under great pressure, out of fear of the unknown, bitter with company’s management whom they no longer trust, in self-defense – the independent auditors resign. In their comment letter to the SEC (regarding the reason for their resignation), the former auditors state: “We no longer can rely on the truthfulness of management’s representations.” Senior management – the CEO, CFO, several division heads, and the controller – are forced to resign. The SEC files with the company a “Wells Notice” indicating that it intends to bring charges against the company and many of the company’s officers and senior management for multiple violations of the anti-fraud provisions of Section 10(B) of the Exchange Act and SEC Rule 10(b)-5. A few days later, the DOJ notifies the company, and its former CEO, CFO and controller, that criminal indictments have been handed down by the Federal Grand Jury – arrests warrants are issued for the CEO, CFO and controller. The indictments make reference to “un-indicted coconspirators,” a division vice president, the manager of revenue accounting; it soon is learned that they both have entered into “plea bargains” with the DOJ for reduced prison sentences – they will testify against the company and its former senior management. By now most of the directors have resigned. The stock price is less than 20 percent of what it had been on the day the investigation was disclosed to the markets. The banks threaten to not renew the company’s revolving credit agreement. Years of private securities litigation are ahead. The DOJ continues to “turn up the heat” on the indicted officers and managers and continue preparing for a criminal trial, now only months away. The SEC staff and the company enter into negotiations – the price of settlement is to accept a cease and desist order in respect of multiple securities fraud and “books and records” violations, and to make additional prior period adjustments for items that the SEC Division of Enforcement staff claim also to be accounting errors and irregularities. Now completely demoralized, and worn down by over eleven months of constant crisis, the company capitulates – a second corrected and amended Form 20-F is filed with rerestated financial statements. New independent auditors finally are convinced to accept the audit engagement; they advise that it will take over three months to audit the current years’ financial statements (now over nine months past-due) and re-audit the prior years financial statements (for which the predecessor auditors have withdrawn their opinions). The DOJ announces that the CFO and controller have agreed to plead guilty in exchange for a reduction in criminal charges – the CFO is sentenced to 10 years in prison, the controller receives an eight-year prison sentence. The CEO resolves to go to trial, and continues to protest his innocence. After tense negotiations, the bank syndicate finally agrees to renew the company’s loan facility, but under much more onerous terms. Now over a year later, the stock price still has not recovered. Business is off sharply, customers have been lost to competitors, key employees have left. New officers have taken over, but management remains in disarray. Quel dammage!


So much already has been said and written about Section 302 Certification, Section 404 Internal Control Reporting, and other procedural elements of Sarbanes-Oxley. Much remains to be explored when the PCAOB actually begins its work. And, the real impact on European companies of SEC and DOJ enforcement has not yet been measured. One can speculate, but this is unproductive because the regulatory enforcement playing field continues to change in Europe and in the U.S. Better to wait and see – how the SEC and DOJ will interact with their regulatory and law enforcement counterparts in the EU, and how the SEC and DOJ actually proceed with investigations involving European companies. In one recent example, Elan, Plc. ultimately adjusted its financial statements reconciliation from Irish to U.S. GAAP for the year 2002 (that had not been audited or issued); this was done in response to SEC challenges of certain accounting treatments for R&D ventures and partnerships, that in turn arose in connection with an ongoing investigation of Elan by the SEC Division of Enforcement.26 In the case of Royal Ahold, the Company has cooperated with ongoing parallel investigations by the SEC and DOJ and has conducted its own internal corporate investigations leading to restatements of prior year financial statements as reported in Ahold’s financial statements for fiscal year December 29, 2002.27 As more cases and more investigations occur, a clearer picture of how the SEC and DOJ will deal with European companies – in applying Sarbanes-Oxley and enforcing its provisions - will emerge. What cannot wait are compliance measures that need to be taken by European companies registered on U.S. exchanges. “Section 404 Readiness” reviews of accounting controls and reporting procedures needs to start now – in order to be prepared for Section 404 reporting next year. Governance procedures, especially those of companies’ audit committees, need to be reviewed and reevaluated in light of Sarbanes-Oxley. Coordination between company management, the company’s audit committee, and the company’s independent auditors is essential. Company management, the company’s internal audit function, and the company’s independent auditors should be taking a closer look at “critical accounting policies” and higher-risk areas where material accounting errors or accounting irregularities could occur. Companies need to reassess the accounting and reporting policies and procedures to be as sure as is reasonably possible that such comply with their basis of GAAP and are properly reconciled to U.S. GAAP. And IFRS is near – 2005 is just around the corner; therefore, companies should be preparing now for conversion. So much to do and so little time! Finally, European companies should remember what Sarbanes-Oxley really is all about … the deterrence of financial frauds and restatements of financial statements due to material accounting errors and accounting irregularities. The surest way to comply with Sarbanes-Oxley is to get the financial statements right the first time.

See Elan Corp. Plc. 2002 Annual Report, page 1, incorporated by reference in Form 20-F for Fiscal Year Ended December 31, 2002 (filed Sept. 4, 2003). See Royal Ahold NV Form 20-F/A for Fiscal Year Ended December 29, 2002 (filed October 31, 2003).



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Brad Greenspan, Pro Se 264 South La Cienega Suite 1016 Beverly Hills, CA 90211 Email: bspan@earthlink.net Ph: 310-345-1983 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION

) CASE NO: 2:06-cv-03731-GHK-Shx JIM BROWN, Individually and on Behalf of All ) Others Similarly Situated, Plaintiff ) CLASS ACTION ) v. ) ) [PROPOSED] ORDER ON DODD FRANK ) 60B4 MOTION BRETT C. BREWER, et atl., ) Defendants ) ) ) ) ) DATE: TBD TIME: TBD COURTROOM: The Hon. George H. King CTRM 650


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HON. GEORGE H. KING UNITED STATES DISTRICT COURT JUDGE IT IS SO ORDERED. Dated: , 2012 The Court, having read all the pleadings and heard argument, and finding good cause, hereby orders that the motion in the above-captioned matter is hereby GRANTED. Including but not limited to immediately vacating the motion to ban and default judgement received by defendants against shareholder Brad Greenspan.


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CERTIFICATE OF SERVICE A copy of the foregoing Motion to Intervene was this day placed in the United States mail, postage prepaid and addressed to:

This, the

day of September 2011,

Overview of Topics
Reporting on Internal Control over Financial Reporting
Historical Perspective Current Reporting Requirements Summary of Reporting Statistics for the First Four Years

COSO’s New Guidance on Monitoring
Project Overview The Value of Monitoring A Model for Monitoring

Presented by Audrey A. Gramling, PhD, CPA, CIA November 18, 2008

The Sarbanes-Oxley Act of 2002

Paul Sarbanes
US Senator – Maryland (Democrat)

Michael Oxley
US Senator – Ohio (Republican)

Sarbanes-Oxley (SOX) – “The most far-reaching reforms of American business practices since Franklin Roosevelt was president”
Pres. George W. Bush

SOX formerly “…would have been an unimaginable incursion of the federal government into the corporate governance arena.”
SEC Commissioner Paul Atkins

Entirely new regulatory regime created for auditors of public companies (issuers)

Adapted from Ronald S. Boster, Special Advisor, PCAOB

SOX passed Congress with only 3 dissenting votes
How did this come about?

Adapted from Ronald S. Boster, Special Advisor, PCAOB


Adapted from Ronald S. Boster, Special Advisor, PCAOB


Corporate Scandals From A to Z

Adelphia (Rigas) Dynegy (Olis) Enron (Skilling, Lay, Fastow) Global Crossing (Winnick) Healthsouth (Scrushy) ImClone (Martha Stewart, Waksal, Baconovic) Nortel (Dunn, Beatty) Quattrone, Frank (IPO) & Qwest (Grass, Brown) Rite Aid (Grass, Brown) Royal Ahold & Parmalat (not just a U.S. problem) Tyco (Kozlowski, Swartz, Belnick) Worldcom (Ebbers, Sullivan) Zerox ZZZ Best

Adapted from Ronald S. Boster, Special Advisor, PCAOB

Loss of Public Confidence
In financial reporting In the accounting/auditing profession In the SEC’s willingness & capacity to enforce securities laws In U.S. capital markets

Loss of Money
“Dot-com bubble” burst Shareholders/employees of “bad” companies

Adapted from Ronald S. Boster, Special Advisor, PCAOB

Implicit focus is broad: to restore public confidence in U.S. capital markets Explicit focus is narrow: “To protect investors by improving the accuracy and reliability of corporate disclosures…”
SOX is clearly aimed at enhancing public corporate governance, management & board responsibility, and transparency
Adapted from Ronald S. Boster, Special Advisor, PCAOB



SOX has been good for audit firms,
“..widely regarded as a licence (sic) for audit firms to print money – “ (Economist, July 28, 2007)

SOX has been savaged by many issuers, primarily smaller companies:
Mostly over costs associated w/ internalcontrol provisions (sec. 404 & AS 2) Larger issuers have generally been supportive or quiet
Adapted from Ronald S. Boster, Special Advisor, PCAOB

Section 404
Reliable Financial Statements

Effective Internal Controls over Financial Reporting (ICFR)

ICFR Reporting Requirements
SOX 404
Internal control report in annual report stating: Management’s responsibility for establishing and maintaining adequate internal control over financial reporting Framework used by management to conduct evaluation of effectiveness of internal control over financial reporting Management’s conclusions about effectiveness of internal control over financial reporting as of yearend, based on management’s evaluation

Requirements of SOX 404 – Cont.
Internal control report in annual report stating: Any material weaknesses in internal control over financial reporting identified by management That external auditor has attested to, and reported on, management’s evaluation ** External auditor shall attest to and report on management’s assessment of internal control for financial reporting **
** Change due to new SEC guidance and AS No. 5

Some important dates for “large” domestic issuers
Large US Accelerated and Accelerated Filers
Public float of more than $75MM

Management report and auditor attestation already required Most of these companies have filed 4 management and auditor reports under SOX 404

Some important dates for “smaller” issuers
First management assessments
Fiscal years on or after December 15, 2007

First audit reports
Fiscal years on or after December 15, 2009

Summary Information on ICFR Reporting
Four years of required ICFR reporting by accelerated filers Do companies have effective ICFR?
NO material weaknesses
consider likelihood and magnitude of potential error

Let’s get your viewpoint!
Which of the following terms would suggest that an event is more likely to occur? A. More than remote possibility B. Reasonable possibility C. More than remote possibility suggests the same likelihood as reasonable possibility

What is a material weakness? For the first three years…..
A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

What is a material weakness? Going forward …..
. . . a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.

Let’s try one. Is this a material weakness in ICFR?
Until August 2006, we did not have any personnel who were familiar with US GAAP We currently do not have sufficient personnel with adequate expertise to ensure that we can produce financial statements in accordance with US GAAP on a timely basis.

Deficiency Example
Your company sells software. Its contracts with customers often have non-standard terms which impact the timing of revenue recognition. All non-standard contracts greater than $1 million are reviewed on a timely basis by your accounting department for appropriate accounting, prior to revenue being recorded. Non-standard contracts less than $1 million are not reviewed. These non-standard contracts less than $1 million dollar represent approximately 25% of the dollar value of all software sales (and represents 20% of total pre-tax income) for your company.

Reporting Results So Far…
First year:
o o

3,812 companies 623 (16.3%) had at least one MW

Second year:
3,969 companies 445 (11.2%) had a least one MW

Third year:
4,569 filings 427 (9.3%) had a least one MW

**Fourth year:
o o

7,697 companies 1,124 (14.6%) had at least one MW

Data compiled from AuditAnaltyics.com, filings through 8/31/08.

Number of Material Weaknesses
First year:
1,520 MWs Average of 2.42

Second year:
1,071MWs Average of 2.41

Third year:
984 MWs Average of 2.30

Fourth year:
2,342 MWs Average of 2.08

Data compiled from AuditAnaltyics.com, filings through 8/31/08.

What about the smaller companies?
Percentage of MW registrants with revenues less than $500 million Year 1: Year 2: Year 3: Year 4: 56.7% (49.7%) 57.3% (49.3%) 56.7% (46.1%) 74.4% (56.1%)

Data compiled from AuditAnaltyics.com, filings through 8/31/08.

Comparing MW and non-MW registrants
On average, registrants with MWs: Are smaller Are less profitable Pay higher audit fees

Data compiled from AuditAnaltyics.com, filings through 8/31/08.

Audit Fee Observation
Difference in fees between those with and without MW
Year 2 With MW No MW Difference 4,151 2,103 2,048 Year 3 4,105 2,762 1,343 Year 4 2,970 2,725 245

Data compiled from AuditAnaltyics.com, filings through 8/31/08. (Only includes Accelerated Filers)

The Top Four ICFR Issues
Year Year Year Year 1 2 3 4 Accounting rule application 98% 99% 99% 100%
failures (GAAP) Accounting documentation, 94% policy and procedures Accounting personnel resources, training and competency issues Segregation of duties/design of controls (personnel)**

99% 99% 97%


58% 58% 72%

16% 17% 45%

Data compiled from AuditAnaltyics.com, filings through 8/31/08.

Insufficient Accounting Resources
During the fourth quarter of 2006, management identified a material weakness in internal controls related to insufficient accounting and financial resources. Management has concluded that additional accounting and finance resources are required. As a result of the insufficient resources the Company did not adequately address the accounting and disclosures for complex transactions, properly monitor internal controls and did not perform a timely and adequate evaluation of general computer controls.

Insufficient Procedures
We did not design and implement controls necessary to provide reasonable assurance that the measurement date for stock option grants was appropriately determined. In particular, the procedures used to approve and process stock option grants were insufficient to ensure that all option grants complied with our stock option plans and the selection of measurement dates conformed to the requirements of applicable accounting rules.

Competency Issues
Our financial and accounting organization was not adequate to support our financial accounting and reporting needs. Specifically, we did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience with Dana and training in the application of GAAP commensurate with our financial reporting requirements.

Low Occurrence MW in Year 4
Ineffective/understaffed internal audit function Senior management resources, competency, reliability Inadequate disclosure controls Ethical compliance issues with personnel Ineffective regulatory compliance issues
Data compiled from AuditAnaltyics.com, filings through 8/31/08.

Audit Committee Problems
Our Audit Committee does not have a financial expert (as defined by SEC rules).
We lack a qualified financial executive to perform independent secondary reviews over complex and non-routine accounting matters to ensure they are reported in accordance with GAAP.

Regulation Compliance Issues
The Company failed to prevent or detect noncompliance with established policies and procedures intended to ensure compliance with laws and regulations. Specifically, this control deficiency may have permitted violations of certain Securities and Exchange Commission (“SEC”) regulations related to previous financial disclosures and the Foreign Corrupt Practices Act (“FCPA”), related to alleged potential payments made to government officials.

Top GAAP Application Failures
Year 1 Accounts, loans receivable, 27% investments / cash Revenue recognition Income taxes Liabilities and payables Inventory, vendor, costs of sales 33% 33% 28% Year 2 26% 31% 34% 28% 27% Year 3 20% 26% 30% 24% 19% Year 4 (AF) 15% (25%) 13% (24%) 12% (30%) 11% (19%) 11% (20%)

Data compiled from AuditAnaltyics.com, filings through 8/31/08.

Tax Issues
. . . largely related to inadequate internal tax resources for a sufficient period of time, lack of formal training for tax personnel and inadequate controls and procedures over the tax accounting process to complete a comprehensive and timely review of the income tax accounts and required tax footnote disclosures . . .

Revenue Recognition (fraud)
This ineffective control environment permitted those former members of senior management to override certain controls. As a result of these overrides, a number of transactions were not properly accounted for in our consolidated financial statements, which resulted in the need to restate our historical consolidated financial statements. Specifically, former senior management entered into licensing agreements with a third-party vendor that lacked commercial and economic substance or proper supporting documentation resulting in the inappropriate capitalization of assets. Former senior management also authorized several sales transactions to this same third-party that lacked economic substance or proper supporting documentation, resulting in the overstatement of earnings in certain periods. Additional transactions with this third-party, which also lacked commercial and economic substance . . .

Now that everything is in place…there is a need to monitor
What is monitoring? Those involved in the COSO's Monitoring Project spent many months developing several draft documents in an attempt to answer that question!

An Overview: COSO's Guidance on Monitoring Internal Controls

Based on Presentation Developed by Grant Thornton LLP.
Source: COSO

COSO’s Internal Control – Integrated Framework
Committee of Sponsoring Organizations (COSO)
American Institute of Certified Public Accountants Institute of Internal Auditors Financial Executives Institute (International) Institute of Management Accountants American Accounting Association

1992 / 1994 Two-volume set (about 360 pages)
Framework Evaluation tools

COSO Definition of Internal Control
Internal control is a process, effected by an entity’s people (board of directors, management and other personnel) designed to provide reasonable assurance regarding the achievement of objectives in

Reliability of financial reporting
Effectiveness and efficiency of operations Compliance with applicable laws and regulations

Overview of COSO's Monitoring Project
"Monitoring ensures that internal control continues to operate effectively."
–1992 COSO Framework Chapter 6

What's the problem?
not recognizing good monitoring not implementing good monitoring

Source: COSO

Based on Presentation Developed by Grant Thornton LLP.

COSO's Monitoring Project Overview
started project in January 2007 participants:
core team review team COSO board COSO taskforce SEC/PCAOB observers 7 4 6 16 2 35

Based on Presentation Developed by Grant Thornton LLP.

Three legs to the "404improvement" stool
Value to companies through improved use of monitoring Value to auditors through ability to focus COSO's on good monitoring Guidance on Monitoring controls PCAOB's AS5 Separate but consistent
(for auditors)

SEC's Guidance
(for mgmt)

Based on Presentation Developed by Grant Thornton LLP.

Example: recognizing the value of monitoring
Let's look at a simple example of the concept. Assume:
a reconciliation control is deemed important to financial reporting the supervisor of the area performs an appropriately detailed review of the reconciliation each time it is prepared
Based on Presentation Developed by Grant Thornton LLP.

Example: recognizing the value of monitoring
simple example (cont'd) the supervisor's review accomplishes two things:
tells him or her whether the control is working encourages continued effective operation of the control

Based on Presentation Developed by Grant Thornton LLP.

Example: recognizing the value of monitoring
How do we often deal with this risk in today's 404 environment?
Management's 404 Process
4. Test the Review 2. Review Reconciliation

Auditor's 404 Audit Process
6. Test the Review

3. Test the Recon.

1. Perform Reconciliation

5. Test the Recon.

Based on Presentation Developed by Grant Thornton LLP.

Example: recognizing the value of monitoring
How might it be done better in a large organization?
Management's Monitoring Process
3. Test the Review

Auditor's 404 Audit Process
4a. Possibly Use the Work of Others or 4b. Test the Review

2. Review Reconciliation

Any further testing of the reconciliation will start with lessons learned from testing the reconciliation review

1. Perform Reconciliation

Based on Presentation Developed by Grant Thornton LLP.

Example: recognizing the value of monitoring
How might it be done better in a small organization?
Management's Monitoring Process If the reconciliation review is performed at the senior-mgmt level, no further evaluation may be necessary Auditor's 404 Audit Process
3. Test the Review

2. Review Reconciliation

1. Perform Reconciliation

Based on Presentation Developed by Grant Thornton LLP.

Again, any further testing influenced by results from testing the reconciliation review

A risk-based revenue example – which controls to monitor and how
Set Objective: Recognize revenue in the proper period Identify Risks:

(1) Revenue is recorded before delivery or title transfer. (2) Sales agents may encourage customers to purchase goods at the period-end by allowing for customers to have a right of return and future credit allowances for unsold goods.

A risk-based revenue example – which controls to monitor and how
Prioritize Risks:
an organization may prioritize the first risk as moderate, and the second risk as high.

Identify controls to mitigate this risk
11 controls are relevant; which are key?

A risk-based revenue example – which controls to monitor and how
Possible key controls
tone at the top whereby management’s philosophy and communication clearly identify that such activity is unacceptable. compensation of sales personnel is reviewed quarterly by the sales manager and adjusted if returns exceed a threshold percentage of sales.

A risk-based revenue example – which controls to monitor and how
Tone at the top control

Compensation review / possible adjustment

A risk-based revenue example – which controls to monitor and how
Then determine:
the mix of ongoing monitoring procedures and separate evaluations, and the mix of direct and indirect information

that will be employed to determine whether the control system is working properly.

A model for monitoring

Source: COSO

Based on Presentation Developed by Grant Thornton LLP.

Establishing a foundation for monitoring
tone from the top role of management and the board right people in monitoring roles baseline of effective internal control Let's focus for a minute on the role of management and the board, and the baseline understanding of internal control effectiveness.
Based on Presentation Developed by Grant Thornton LLP.

Develop and implement Develop and implement cost-effective procedures cost-effective procedures to evaluate that to evaluate that persuasive persuasive information information

Understand and prioritize Understand and prioritize risks to organizational risks to organizational objectives objectives

Implement Monitoring


Prioritize Risks


Effective Monitoring
Identify Information
Identify Identify information that information that will persuasively will persuasively indicate whether the indicate whether the internal control system internal control system is operating effectively is operating effectively


Identify Controls


Identify key Identify key controls across the controls across the internal control system internal control system that address those that address those prioritized risks prioritized risks

Based on Presentation Developed by Grant Thornton LLP.

Source: COSO

1. Risk-based approach

Identify and Prioritize Risks

Meaningful Risk
Understand the Internal Control System Identify Key Controls
Identify Persuasive Information
Develop Monitoring
Based on Presentation Developed by Grant Thornton LLP.

Key Controls Persuasive Info

2. Understand internal controls and identify key controls
understand how the internal control system manages meaningful risks identify those controls that are "key"
their failure (a) is reasonably possible, (b) is material, and (c) would not be detected by other controls, and/or their operation will catch other weaknesses before they can become material
Based on Presentation Developed by Grant Thornton LLP.

Two important questions
What information should the company evaluate? (Hint: it should be relevant, reliable and timely.) What procedures should it employ?
ongoing monitoring separate evaluations

Based on Presentation Developed by Grant Thornton LLP.

3. Identify persuasive information

(with a focus here on relevance)
two types of relevant information:
direct — clearly substantiates the Relevant operation of controls and is most Need Need Timely Reliable relevant Info Relevant, Info Reliable & indirect — all other information Timely that relates to the operation of Reliable Need Timely Relevant controls and is less relevant than Info direct information indirect information can help identify when controls fail, but does not provide absolute support that controls operated effectively Based on Presentation Developed by Grant Thornton LLP.
Source: COSO

Proper balance of direct vs. indirect is risk dependent
Direct Info A

Indirect Info

Direct Info

Direct Info

Indirect Info


Direct Info Direct Info


Based on Presentation Developed by Grant Thornton LLP.

Direct Info

4. Implement monitoring procedures
"An entity that perceives a need for frequent separate evaluations should focus on ways to enhance its ongoing monitoring activities and, thereby, to emphasize 'building in' versus 'adding on' controls."–1992 COSO Framework, Chapter 6
Ongoing monitoring: • often closer to operation of controls • offers earliest opportunity to identify weaknesses Separate evaluations: • often more objective • can revalidate results of ongoing monitoring
Based on Presentation Developed by Grant Thornton LLP.

Putting it all together
Direct Ongoing monitoring
•• Typically most Typically most persuasive persuasive •• Especially valuable in Especially valuable in high-risk areas high-risk areas

•• Can enhance Can enhance monitoring efficiency monitoring efficiency •• Provides support to Provides support to direct info direct info

Separate evaluation

•• Primarily used to Primarily used to revalidate conclusions revalidate conclusions reached through reached through ongoing monitoring ongoing monitoring

•• Typically least Typically least persuasive persuasive •• Can help scope other Can help scope other SE procedures SE procedures

Based on Presentation Developed by Grant Thornton LLP.

A corporate governance perspective on reporting results
How should monitoring results be communicated within an organization?
Is top management fully aware of the key results? Is the audit committee tracking the monitoring results in a meaningful way? Are the efforts of management, internal audit, and the external auditors communicated such that each party understands the larger picture of monitoring?

A model for monitoring

Source: COSO

Based on Presentation Developed by Grant Thornton LLP.


Based on Presentation Developed by Grant Thornton LLP.

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